Question

Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. How can there be positive unemployment in this situation?

Short answer

This unemployment is due to technical influences, and because we keep technological and other factors constant, a natural rate of unemployment exists, giving the rate of unemployment at the LRAS a positive value.

Step-by-step solution

Production Components.

All of the production components are completely utilised on the long run aggregate supply curve (LRAS). To put it another way, the production combination will follow the PPF curve.

Because prices and wages have adequate time to adjust in the long run, the real GDP created by the economy is the optimal level of output. As a result, all of the components will be utilised to their full potential in order to achieve full employment.

Technical influences.

However, there is a natural degree of unemployment at this level of output, which has existed due to frictional and structural unemployment.

This unemployment is attributable to technical influences, and because we keep technological and other factors constant, a natural rate of unemployment persists, giving the unemployment rate at the LRAS a positive value.