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.

The economy in the diagram below begins in long-run equilibrium at E<sub>0</sub>. FIGURE 30-2 -Refer to Figure 30-2.At E<sub>0</sub>,the unemployment rate is 5.6%.An increase in the price of raw materials shifts the AS curve to AS<sub>1</sub> and a new short-run equilibrium is established at E<sub>1</sub>.At E<sub>1</sub>,the unemployment rate is 7%.Therefore,other things being equal, A) the NAIRU is 7%. B) the sum of frictional and structural unemployment is 7%. C) cyclical unemployment is 1.4%. D) the economy is at full employment. E) cyclical unemployment is negative.

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 leads to a higher cost of production, causing the AS curve to shift to the left. As a result, the economy moves from the original long-run equilibrium to the new short-run equilibrium at E₁, where the unemployment rate is higher at 7%. The difference between the original unemployment rate of 5.6% and the current unemployment rate of 7% are due to cyclical unemployment caused by the temporary deviation from the long-run equilibrium. Therefore, the cyclical unemployment rate is 1.4%. Choices A, B, and D are incorrect because they do not accurately reflect the situation in the economy. Choice E is not possible as cyclical unemployment cannot be negative.

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