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?

a) A shift from short-run to long-run equilibrium in the AS curve.
b) A movement along the AD curve indicating reduced consumer spending.
c) A shift in the AS curve to the right indicating increased production potential.
d) A shift in the AS curve to the left indicating a decrease in potential GDP.

Answer 1

An increase in structural unemployment is shown in the AD/AS model by a leftward shift in the AS curve, representing a decrease in potential GDP.

Step-by-step explanation:

If the level of structural unemployment increases, this would typically be illustrated in the AD/AS model as a shift in the Aggregate Supply (AS) curve to the left, indicating a decrease in potential Gross Domestic Product (GDP). This shift reflects a reduction in the economy's capacity to produce goods and services, which can occur when there's a mismatch between the skills of the workers and the needs of employers. Structural unemployment does not affect the Aggregate Demand (AD) curve directly since it's more a factor of production potential than demand in the economy.