Question

Take a look at Figure $17-3$. Explain whether the cyclical unemployment rate is positive, zero, or negative at point $E_2$, after the shift in the aggregate demand curve from $A{D}_1$to $A{D}_2$. In addition, explain whether the cyclical unemployment rate is positive, zero, or negative at point $E_3$the shift in the short-run aggregate supply curve from $SRA{S}_1$to $SRA{S}_2$.

Short answer

The cyclical unemployment rate is negative at point $E_2$

The cyclical unemployment rate is positive at point $E_3$

Step-by-step solution

Given Information

The cyclical unemployment rate is positive, zero, or negative at the point of $E_2$and$E_3$

Explanation

• From $120$to $118$, and real GDP declines from $\$18$trillion to $\$17.7$ trillion. Fewer firms are hiring, and people that are hiring offer fewer overtime possibilities. Individuals searching for jobs find that it takes longer than predicted.
• The equilibrium at $E_2$ is merely a short-run situation, however. As input owners change their expectations about future prices, $SRA{S}_1$shifts to $SRA{S}_2$and input prices fall.
• The new long-run equilibrium is at $E_3$, which is on the long-run aggregate supply curve $LRAS$. within the future, the value level declines further, to 116 , as real GDP returns to$\$18$ trillion. Thus, within the long term thepercent returns to its natural level.