Discuss the current cash flow on investment decisions

Question

Assignment:

Technological progress: The short-run and the medium-run

1. Suppose that the labor market of an economy in the medium-run is characterized by the following equations:

Price setting: P = (1 + m)W/A

Wage setting: W = A^eP^e(1 - u)

a) Solve for the unemployment rate (that is, find the natural rate of unemployment) if P^e = P, but A^e does not necessarily equal A, so that A^e ≠ A. What would be the effect of A / A^eon the natural rate of unemployment?

b) Suppose now that expectations of both prices P and productivity A are accurate, so that P^e = P and A^e = A. Solve for the natural rate of unemployment if the markup (m) is equal to 5%.

u_n = 1-1/1+m = 1-1/1+5% = 4.76%

c) Given your answers to parts (a) and (b), does the natural rate of unemployment depend on productivity? Explain the logic behind your answer.

2. Discuss the effects of profitability and current cash flow on investment decisions.