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Chapter 24: Q. 34 (page 602)

How is cyclical unemployment illustrated in an AD/AS model?

Short Answer

Expert verified

Cyclical unemployment shifts the AD curve to the left.

Step by step solution

01

Definition

When the economy goes up or down then cyclical unemployment occurs. This mainly occurs at the time of the recession period. AD/AS Model illustrates the aggregate demand and aggregate supply of goods and services in an economy for the short-run and the long-run period.

02

Explanation

Cyclical unemployment occurs during upturns and downturns of the economy. This happens during a recession period. In that, the economy's aggregate demand falls due to which equilibrium point changes. The aggregate demand falls below its potential GDP which means the AD curve shifts to the left due to which the economy faces loss.

03

Graph

As shown in Fig 1 during the cyclical unemployment makes the AD curve shifts leftward from AD to AD1

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Most popular questions from this chapter

How is pressure for inflationary price increases shown in an AD/AS model?

In your view, is the economy currently operating in the Keynesian, intermediate or neoclassical portion of the economy’s aggregate supply curve?

Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?

If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.

What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?
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