Question

Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model? Hint: How does structural unemployment affect potential GDP?

In your view, is the economy currently operating in the Keynesian, intermediate, or neoclassical portion of the economy's aggregate supply curve?

Answer 1

In the AD/AS model, an increase in structural unemployment is illustrated by a leftward shift of the LRAS curve, leading to a decrease in output and employment.

Step-by-step explanation:

In the AD/AS model, an increase in structural unemployment would be illustrated by a leftward shift of the long-run aggregate supply (LRAS) curve. This would happen because structural unemployment decreases the economy's potential GDP. When the LRAS curve shifts left, the equilibrium level of output and employment decreases. This means that the economy is operating below potential GDP and experiencing higher levels of unemployment.

The AD/AS model can be divided into three portions: the Keynesian portion, the intermediate portion, and the neoclassical portion. Based on the given information, it is not possible to determine in which portion the current economy is operating. However, the neoclassical zone of the SRAS curve is characterized by near-vertical shape, where changes in aggregate demand have little effect on output or employment. In this zone, increases in potential GDP can only be achieved by shifts in aggregate supply (AS).