In the AS-AD model, cyclical unemployment occurs when: a. aggregate supply increases b. the economy is not at a short run equilibrium in the AS-AD model actual DP falls below potential real GDP in the equilibrium of the AD and short-run AS curves

Question

Marlie Randolph

Business

29 July, 16:35

In the AS-AD model, cyclical unemployment occurs when: a. aggregate supply increases b. the economy is not at a short run equilibrium in the AS-AD model actual DP falls below potential real GDP in the equilibrium of the AD and short-run AS curves

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Ava Waller · Answer 1

b. the economy is not at a short run equilibrium in the AS-AD model actual DP falls below potential real GDP in the equilibrium of the AD and short-run AS curves.

Explanation:

The aggregate demand/aggregate supply, or AD/AS, model is one of the fundamental tools in economics because it provides an overall framework for bringing economic factors together.

We can examine long-run economic growth using the AD/AS model, but the factors that determine the speed of this long-term economic growth rate do not appear directly.

Cyclical unemployment is relatively large in the AD/AS framework when the equilibrium is substantially below potential GDP and relatively small when the equilibrium is near potential GDP.

The natural rate of unemployment-as determined by the labor market institutions of the economy-is built into potential GDP.

Pressures for inflation to rise or fall are shown in the AD/AS framework when the movement from one equilibrium to another causes the price level to rise or to fall.