The economy in the diagram below begins in long-run equilibrium at E₀. FIGURE 30-2 Refer to Figure 30-2.At E₀,the unemployment rate is 5.6%.An increase in the price of raw materials shifts the AS curve to AS₁ and a new short-run equilibrium is established at E₁.At E₁,the unemployment rate is 7%.Therefore,other things being equal,

Question

Quizplus · Accepted Answer

The increase in price of raw materials leads to a shift of the AS curve and an increase in the unemployment rate from 5.6% to 7%. Therefore, the difference between the two unemployment rates (7% - 5.6% = 1.4%) represents the cyclical unemployment, which is caused by the shift in the short run. The NAIRU or full employment level is not necessarily equal to the unemployment rate at any given point in time, and the sum of frictional and structural unemployment is not relevant in this scenario. Cyclical unemployment cannot be negative.

The Economy in the Diagram Below Begins in Long-Run Equilibrium