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

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,

Quizplus · Accepted Answer

The increase in the price of raw materials has caused a decrease in aggregate supply, leading to a reduction in real GDP and an increase in unemployment. The difference between the new unemployment rate at E1 and the unemployment rate at long-run equilibrium (5.6%) is the cyclical unemployment rate. Therefore, the cyclical unemployment rate at E1 is 1.4% (7% - 5.6%).

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