Question

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

Short answer

Cyclical unemployment shifts the AD curve to the left.

Step-by-step solution

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.

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.

Graph

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