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Chapter 24: Q. 35 (page 602)

How is the natural rate of unemployment illustrated in an AD/AS model?

Short Answer

Expert verified

The natural rate of unemployment is illustrated by the position of the LRAS curve in an AD/AS model.

Step by step solution

01

Step 1. Natural rate of unemployment

The performance of the economy's market and government institutions in bringing employees and employers closer together in the labour market determines the natural rate of unemployment.

Unemployment is mostly caused by variations in business activity. It continues to leap up and down in response to changes in the short-run GDP.

02

Step 2. Cyclical unemployment

Cyclical unemployment is reflected withinside the AD/AS diagram with the aid of using how near the economy is to attain its complete employment potential. When an economy's output is near to its potential GDP, it has relatively low cyclical unemployment (LRAS). High cyclical unemployment, on the other hand, occurs when aggregate output is much to the left of potential GDP (LRAS) on the AD/AS diagram. Despite the fact that they are implicitly part of what defines potential GDP or full employment GDP in a given country, the components that influence the natural rate of unemployment are not specified individually in the AD/AS model.

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Most popular questions from this chapter

In the AD/AS model, what prevents the economy from achieving equilibrium at the potential output?

If Congress cuts taxes at the same time that businesses become more pessimistic about the economy, what is the combined effect on output, the price level, and employment using the AD/AS diagram?

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sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the flows of imports, exports,

and the payments for each on your diagram.$200

Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.

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