For this problem think about wage-setting and price-setting, incorporating expec

Question

For this problem think about wage-setting and price-setting, incorporating expectations about productivity.

Suppose an economy experiences technological change at rate gA, depreciation at rate delta, and population growth at rate gN.

Furthermore, the economy saves at a constant rate(s). If the economy is in steady state, and the unemployment rate is at the natural level (Un), we would expect:

A. The natural unemployment rate to remain at the same level if nothing else changes in the economy

B. The natural unemployment rate to decrease over time if nothing else changes in the economy

C. The natural unemployment rate to increase over time if nothing else changes in the economy

D. None of the options listed

Explanation / Answer

The economy will be in the steady state if technology, depreciation, population, savings does not change. At the steady state output per capita does not change thus unemployment does not change. So the natural unemployment rate remains at the same level. Option A is correct.

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