Using a neoclassical model, what will the level of cyclical unemployment be when an economy is producing at potential GDP?

A. zero

B. never 0%

C. 1% - 3%

D. 3% - 5%

Zero

Explanation:

There are three (3) types of unemployment recognized by economists;

Structural unemployment: This occurs where innovation and technological improvement render workers unemployable because their is a mismatch between the available jobs and the skills possessed by willing workers. For example, the introduction of online classes might reduce the number of teachers needed by a school.

Frictional unemployment: This is used to describe the number of people looking for jobs because they are transiting from one job to another. The addition of the structural and frictional is know as the natural rate of of unemployment.

Cyclical unemployment: this is caused by fluctuation in real GDP around the potentila GDP. For example, when the real GDP falls significantly for a sustained period of six month. At a time like this, the economy is contracting and it is evident by a negative growth rate in real output, firms do lay off workers because the business climate is not favorable. This is called recession. The cyclical unemployment is the difference between the actual rate of unemployment and natural rate. During recession, the actual is always greater thant the natural; and the balance is cyclical unemployement

Full employment output and cyclical unemployment

The potential GDP is the level of real GDP achieved where an economy has fully employed all of its resources (land, labour, capital and entrepreneur). It is also called full employment GDP. An economy operating at its potential GDP level will still record some level of unemployment which is known as natural unemployment. And its actual rate of unemployment will be equal to the natural rate.

In other words, at the full employment output level, the actual rate of unemployment is the same the natural rate of unemployement. So there is zero cyclical unemployment rate