Question

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

Answer 1

Zero

Step-by-step explanation:

When an economy runs in its potential manner, and the GDP with maximum potential is received, then the income distribution of the concerned economy is optimal.

Further, as per neoclassical model, if the economy is producing at potential GDP, that is the supply chain is 100% efficient, then then level of cyclical unemployment shall be 0%.

The neoclassical model is based on the study of supply and demand of products in the market, with the help of which income distribution, distribution of goods, and various other outputs is computed in this model.

Thus, when an economy is producing at potential level then the income distribution shall also be potential, accordingly cyclical unemployment shall be zero.