Question

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

Short answer

The most common cause of cyclic unemployment is changes in corporate activity.

Because there is a direct relationship between quantity supplied and price, the SRAS curve is positively slopped.

The total quantity of products and services sought by consumers at a given price level and period is known as aggregate demand.

Step-by-step solution

Introduction

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

Explanation

The most common cause of cyclic unemployment is changes in corporate activity. Because of the enormous inventory stock, enterprises have little motivation to create more when output is low. As a result, workers lose their jobs. In the short term, this results in joblessness.

Real GDP is plotted on the $x$- axis, while price level is plotted on the $y$-axis in the diagram above.

The intersection of the AD curve with the SRAS results in equilibrium at $E_0$, price level at $P_0$, and output at $Y_0$.

High Unemployment Cyclic Fluctuation is defined as a large difference between actual GDP and potential GDP. Actual and potential GDP are vastly different.

As the AD curve moves right from $AD0$to $AD1$, a new equilibrium is reached at a higher level.

Equilibrium is located at $E_1$, the price level is located at $P_1$, and the output is located at $Y_1$.

Output is boosted due to a rightward shift in the AD curve. Because it is close to potential GDP, this is considered a low cycle unemployment level.