Rationale for the Horizontal Price-Setting Curve
In the standard macroeconomic model where firms set prices as a markup over their costs, explain why an increase in the total number of workers employed across the economy does not, by itself, lead firms to change the real wage they offer.
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A government successfully implements a new policy that increases the national employment level by 5%, but this policy does not alter average worker productivity or the degree of competition among firms. Based on the model where firms set prices as a markup over their costs, what is the direct consequence of this higher employment on the price-setting real wage?
Impact of a Labor Supply Shock
According to the model where firms set prices as a markup over their labor costs, a significant increase in the national level of employment will cause the price-setting real wage to decrease.
Rationale for the Horizontal Price-Setting Curve