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Recall that in the standard Mortensen and Pissarides search and matching model stud- ied in class the equilibrium is given by the intersection of the job creation (JC) and the wage bargaining (WB) curves, where we use the same notation as in class. Furthermore, the (Continued on next page) model implies a Beveridge curve (BC). Page 6 of 7 JC: w=p- 1 1 1 f (0) 2 WB: w=p+ b+ BC: M (U,V) = 8 (L-U) 21-f (0) q (0) Denote the equilibrium labor market tightness and wages w". In addition, let the match- ing function be M (U,V), that satisfies the assumptions laid out in class. (a) (9 marks) Use these equations to plot the search model equilibrium, on a graph with w on the vertical axis and on the horizontal axis and another graph with r on the vertical axis, and u on the horizontal axis. Explain the intuition for the shape of the JC and WB curves on the first graph. (b) (6 marks) Explain using both graphs how the equilibrium would change in response to an increase in labour productivity. (c) (6 marks) Explain how the previous result can be used to explain empirical Beveridge curves (i.e. a plot on v and u space with historical data). (d) (6 marks) Explain using both graphs how the equilibrium described in (a) would change in response to an increase in the value of unemployment benefits. (e) (8 marks) Explain how unemployment benefits would have to change over the business cycle in order to help explain the employment volatility puzzle. Use the graphs to support your arguments. Is that realistic?