Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 24: Problem 5

As output increases along the short-run aggregate supply curve, briefly explain what happens to the natural rate of unemployment and to the cyclical rate of unemployment.

Short Answer

Expert verified
As the output increases along the short-run aggregate supply curve, the natural rate of unemployment remains unchanged as it is determined by structural and institutional factors. The cyclical rate of unemployment, however, decreases as the economy operates closer to full employment.

Step by step solution

01

Understanding SRAS, Natural Unemployment Rate and Cyclical Unemployment

To commence, it's important to grasp the meaning of the key terms. The SRAS curve represents the total quantity of goods and services produced by firms for given overall price levels at a particular time period. The Natural Rate of Unemployment is the unemployment rate when the economy is at full employment - meaning that cyclical unemployment is zero. It consists of frictional and structural unemployment. The Cyclical Unemployment refers to the deviation of the actual unemployment rate from the natural rate due to business cycles, that is, the extent to which actual unemployment is greater or lesser than the natural rate.
02

Understanding Output and Natural Rate of Unemployment

The natural rate of unemployment is not affected by the increase in output along the SRAS, because it is determined by structural factors, such as technology and demographics, not by actual economic conditions. It would remain the same, irrespective of the productive output.
03

Understanding Output and Cyclical Unemployment

Cyclical unemployment, however, decreases when output increases along the SRAS curve. In recessionary conditions, when the output is low, the cyclical unemployment is high because firms lay off workers in response to lower demand for goods and services. Conversely, in an expanding economy, where output is increasing, the demand for labor also rises which leads to a decrease in cyclical unemployment.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What variables cause the long-run aggregate supply curve to shift? For each variable, identify whether an increase in that variable will cause the long- run aggregate supply curve to shift to the right or to the left.

An article in the Wall Street Journal noted that real GDP in Greece declined during \(2016 .\) The article stated that economists "attributed it to a \(2.1 \%\) decline in [government spending] and weaker net exports" a. Use a basic aggregate demand and aggregate supply graph (with LRAS constant) to illustrate what happened in Greece in 2016 b. On your graph, show the adjustment back to long-run equilibrium. Source: Nektaria Stamouli, "Greek Economy Contracts at Faster Pace than Estimated Adding Hurdle to Bailout Talks," Wall Street Journal, March 6,2017

In \(2017,\) an article in the Wall Street Journal discussing the latest data on U.S. net exports noted that, along with other currencies, "the [Chinese] yuan has risen this year against the dollar." The article also noted that there had been "stronger [economic] growth in Asia and Europe." a. What does the article mean by noting that the yuan had "risen" against the dollar? b. Briefly explain whether the combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe had led to an increase or a decrease in U.S. net exports. c. Will the outcome you discuss in part (b) result in a movement along the U.S. aggregate demand curve or a shift of the curve? Briefly explain.

Explain whether you agree with the following statement: The dynamic aggregate demand and aggregate supply model predicts that a recession caused by a decline in \(A D\) will cause the inflation rate to fall. I know that the \(2007-2009\) recession was caused by a fall in \(A D,\) but the inflation rate was not lower as a result of the recession. The prices of most products were definitely higher in 2008 than they were in 2007 , so the inflation rate could not have fallen.

A student is asked to draw an aggregate demand and aggregate supply graph to illustrate the effect of an increase in aggregate supply. The student draws the following graph: The student explains the graph as follows: An increase in aggregate supply causes a shift from \(\operatorname{SRAS}_{1}\) to \(S R A S_{2}\). Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right, from \(\mathrm{AD}_{1}\) to \(\mathrm{AD}_{2}\). We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, \(P_{3}\), as being lower than the initial price level, \(P_{1}\). Explain whether you agree with the student's analysis. Be careful to explain exactly what - if anything-you find wrong with this analysis.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free