The diagram below shows a simple \(A D / A S\) diagram. The economy begins in long-run equilibrium at \(E_{0}\) with real GDP equal to \(Y^{*}\).

a. At \(E_{0}\), the unemployment rate is 6 percent. What type of unemployment is this?

b. A negative aggregate supply shock now shifts the \(A S\) curve to \(A S^{\prime}\). At \(E_{1}\) the unemployment rate is 7 .5 percent. Is there cyclical unemployment at \(E_{1}\) ? How much?

c. If monetary and fiscal policy do not react to the shock, describe the economy's adjustment process to its new long-run equilibrium.

d. What is the unemployment rate at the economy's new long-run equilibrium? What kind of unemployment exists there? Explain.

Transcribed Image Text:

Price Level 0 y* Ep Real GDP AD AS' AS