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Chapter 11: 35 (page 292)

How is the natural rate of unemployment

illustrated in an AD/AS model?

Short Answer

Expert verified

The natural rate of unemployment is the lowest rate of unemployment when the labor and goods markets are in balance.

Step by step solution

01

Introduction

The aggregate demand–aggregate supply model, also known as the AD–AS model, is a macroeconomic model that explains price levels and production by examining the link between aggregate demand (AD) and aggregate supply (AS).

02

Explanation

The AD curve crosses the SRAS curve in the diagram above. Because there is a large disparity between current GDP and potential GDP, equilibrium is achieved at E0, price level at P0, and real GDP at Y0.

The AD curve changes rightwards from AD0to AD1as aggregate demand rises. New equilibrium is reached at E1when the new AD curve intersects with the SRAS curve. The intersection of the New AD curve with the SRAS results in a greater level of output, which signifies a higher rate of employment.

Because the new equilibrium is close to potential GDP, it leads to higher output and a natural rate of unemployment, which exists even at full employment in the long run.

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Most popular questions from this chapter

Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this

policy most likely have on output, the price level, and employment?

What is Keynes’ law?

The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 11.3 shows.

Price Level
AD
AS
100
700
200
120
600
325
140
500
500
160
400
570
180
300
620

a. Plot the AD/AS diagram. Identify the equilibrium. b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original output, price level, and employment?

If firms become more optimistic about the future of the economy and, at the same time, innovation in 3-D printing makes most workers more productive, what is the combined effect on output, employment, and the price-level?

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