Question

Consider the following table in which columns (1) and (2) give information about the initial short-run aggregate supply curve for the fictional country of Zerovia. Column (3) shows total employment at different output levels. There are eight million workers in the total labour force. Usually, 500 000 workers are structurally or frictionally unemployed. TABLE ONE show (1) Price Level (Index) 115 110 105 100 95 750 (2) (3) (5) Aggregate Total Output Output tout Output OutputEmployment Demanded Demanded Demanded billion $ full-time equiv. billion $ billion $ billion $ 9307 650 000 600 u 700 800 920 7 600 000 650 900 7 550 000 700 800 900 850 7 500 000 750 850 950 800 7 450 000 800 900 1000 7 400 000 750 800 1000 900 000 700 7 200 000 800 900 650 650 69 6 900 000 800 900 1000 8509501050 1000 95 90 [12 points] Initially, aggregate demand is shown by columns (1) and (5). Graph this AD curve (ADa) on "Figure One", along with the short-run aggregate supply curve (ASI) described by columns (1) and (2). What is the equilibrium price level? What is the equilibrium level of output? What is the equilibrium unemployment rate? What is the rate of cyclical unemployment?

Answer 1

Solution:

Price -125 -120 -115 -116. -105- -100- -95 -90 Output -800 1000

In above graph, red line shows the aggregate demand curve and black line shows the short run aggregate supply curve.

Equilibrium price is $100 and equilibrium output is 850 as can be seen from the table also.

Equilibrium unemployment rate = unemployed/total labour force = 500000/8000000 = 6.25%

Cyclical unemployment rate = Current unemployment rate – (Frictional unemployment rate + Structural unemployment rate) = 6.25 -(500000/8000000)*100 = 6.25-6.25 = 0.

Cyclical unemployment rate is zero because total number of frictionally and structurally unemployed labor is 500000 and there are no people unemployed due to cyclical fluctuation.