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 8 percent. What type of unemployment is this?

b. A positive aggregate demand shock now shifts the \(A D\) curve to \(A D^{\prime}\). At \(E_{1}\) the unemployment rate is only 6 .5 percent. Is there cyclical unemployment at \(E_{1}\) ?

c. Describe the economy's adjustment process to \(E_{2}\).

d. What is the unemployment rate at \(E_{2}\) ? What kind of unemployment exists at \(E_{2}\) ?

Transcribed Image Text:

Price Level AS" AS E AD' 0 Y Fo Real GDP AD