MORE ON UNEMPLOYMENT
297
to
U
1
and so the output rises as traced out via the production function part of the
figure (see panel B in Figure 10.2). Conversely, if there is a decline in the price,
the real wage rises, firms employ less, and there is a rise in unemployment along
with a decline in output. In the short run then, we have an upward-sloping supply
curve, which results due to nominal wage stickiness,
AS
(w = w
0
).
When the real wage equals the efficiency wage
w
0
/p
0
, unemployment is
at its natural rate
U*
and the quantity of output produced is the natural rate
of output
Y *.
New Keynesians attempt to differentiate ...
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