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The Phillips curve, supply shocks, and wage flexibility Suppose that the Phillips curve is given by...

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Economics

The Phillips curve, supply shocks, and wage flexibility Supposethat the Phillips curve is given by ?? = ?? ? − ?(?? − ?? ) (1)

where the natural rate of unemployment, ?? = ?+? ? .

[Recall that this Phillips curve was derived under price-settingand wage-setting:

?? = (1 + ?) ?? (2)

?? = ?? ? (1 − ??? + ?) (3)

where m is the mark up over marginal cost, which is just thewage rate Wt when output is assumed to simply equal employment: ??= ?? We can think of ? as a measure of wage flexibility---thehigher is ?, the greater is the response of the wage to a change inthe unemployment rate, ?? . z represents other factors affectingwage bargains.]

a. Explain how you obtain (1) from (2) and (3).

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