The economy in the diagram below begins in long-run equilibrium at E0.
FIGURE 30-2
-Refer to Figure 30-2. Suppose the economy is in a recession at equilibrium E 1 that is very long lasting. As a result, many young workers are unable to enter the labour market for the first time and are unable to gain experience. These workers continue to have higher than average unemployment rates when the recession is over, causing the NAIRU to rise. This is an example of

Question

The economy in the diagram below begins in long-run equilibrium at E0.
  FIGURE 30-2
-Refer to Figure 30-2. Suppose the economy is in a recession at equilibrium E 1 that is very long lasting. As a result, many young workers are unable to enter the labour market for the first time and are unable to gain experience. These workers continue to have higher than average unemployment rates when the recession is over, causing the NAIRU to rise. This is an example of

Quizplus · Accepted Answer

The situation described is an example of hysteresis, which refers to the long-lasting effects of a recession on the economy, even after the recession has ended. In this case, the higher than average unemployment rates for young workers persist even after the recession is over, causing the Non-Accelerating Inflation Rate of Unemployment (NAIRU) to rise. This suggests that the economy may not be able to return to its original long-run equilibrium point and may have a higher natural rate of unemployment going forward.

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