For this question, assume that the domestic interest rate is 6 ...

[melly21297]

For this question, assume that the domestic interest rate is 6 and that the foreign interest rate 4. And finally, assume that the domestic currency is expected to appreciate by 3 during the coming year. Given this information, we know that
 
  A) individuals will only hold domestic bonds.
  B) individuals will only hold foreign bonds.
  C) individuals will be indifferent about holding domestic or foreign bonds.
  D) the interest parity condition holds.

Question 2

Graphically illustrate (using the WS and PS relations) and explain the effects of an increase in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output.
 
  What will be an ideal response?

[yahahah24021]

Answer to Question 1

A

Answer to Question 2

An increase in the markup will cause firms to raise the price given the nominal wage. This will cause the real wage based on price setting behavior to decrease; this is represented by a downward shift in the PS curve. This reduction in the real wage will also occur with an increase in the unemployment rate. So, the natural rate of unemployment will rise and the natural level of employment and, therefore, output will fall. The equilibrium real wage will also be lower.

[melly21297]

TYSM

[ricroger]

Excellent