The economy in the diagram below begins in long- run equilibrium at E₀.
FIGURE 31- 2
-Refer to Figure 31- 2. At E₀, the unemployment rate is 5.6 percent. An increase in the price of raw materials shifts the AS curve to AS₁and a new short- run equilibrium is established at E₁. At E₁, the unemployment rate is 7 percent. Therefore,

Question

The economy in the diagram below begins in long- run equilibrium at E₀.

The economy in the diagram below begins in long- run equilibrium at E<sub>0</sub>. FIGURE 31- 2 -Refer to Figure 31- 2. At E<sub>0</sub>, the unemployment rate is 5.6 percent. An increase in the price of raw materials shifts the AS curve to AS<sub>1</sub><sub> </sub>and a new short- run equilibrium is established at E<sub>1</sub>. At E<sub>1</sub>, the unemployment rate is 7 percent. Therefore, A) the economy is at full employment. B) cyclical unemployment is negative. C) the sum of frictional and structural unemployment is 7 percent. D) the NAIRU is 7 percent. E) cyclical unemployment is 1.4 percent.

FIGURE 31- 2
-Refer to Figure 31- 2. At E₀, the unemployment rate is 5.6 percent. An increase in the price of raw materials shifts the AS curve to AS₁and a new short- run equilibrium is established at E₁. At E₁, the unemployment rate is 7 percent. Therefore,

Quizplus · Accepted Answer

A shift in the AS curve due to an increase in input prices causes a decrease in output and an increase in the price level. As a result, the economy moves from point U1 to point U2, where unemployment has increased from 5.6% to 7% and the cyclical unemployment rate is (U2-U1)/(L*(1- U1))= (7-5.6)/(1-(5.6/100))=1.4%. Therefore, choice E is the correct answer.

The Economy in the Diagram Below Begins in Long- Run