Suppose that the markup of goods prices over marginal cost is 5%, and that the wage-setting equation is W = P(1 − u) where u is the unemployment rate. 1. What is the real wage, as determined by the price-setting equation? 2. What is the natural rate of unemployment? 3. Suppose that the markup of prices over costs increases to 10%. What happens to the natural rate of unemployment? Explain the logic behind your answer.

Determine if the following statements are true or false. an increase in government spending can crowd out private investment. an improvement in the budget balance increases the demand for financial capital. an increase in private consumption may crowd out private investment. lower interest rates can lead to private investment being crowded out. a trade balance in sur+ increases the supply of financial capital. if private savings is equal to private investment, then there is neither a budget sur+ nor a budget deficit.