Macroeconomists are usually interested in the following questions. How are aggregate labour market outcomes: unemployment, job vacancies, and employment determined as equilibrium phenomena? Why do unemployed workers and unfilled vacancies coexist?
Suppose that the government can operate 𝐺 firms, subject to the same constraints as private firms. The government also incurs the same cost (𝑘) to post a vacancy and pays the same wages (𝑤) as private firms. Discuss the possible effects of 𝐺 on the labour market tightness, the labour force, the number of private firms and the aggregate output in the economy.
Use the Diamond-Mortensen-Pissarides (DMP) model to answer the above questions.
Note: Use equations and graphs in your answer ONLY if you want to use them