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# Aggregate Supply and Demand, and Unemployment

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1a. Describe what happens to the natural rate of unemployment and potential GDP if cyclical unemployment rises to 3 percent with other types of unemployment unchanged.

b. Describe what happens in the natural rate of unemployment and potential GDP if structural unemployment fails to 1.5 percent with other types of unemployment unchanged.

2. Self-correction is the ability of the economy to eliminate any imbalances between actual and potential output. Using an aggregate supply and aggregate demand, show why this self-correction process involves only temporary periods of inflation or deflation.

5. What are three factors that can change the economy's potential output? What is the impact of shifts of the aggregate demand curve on potential output?

https://brainmass.com/economics/aggregate-demand-and-supply/aggregate-supply-demand-unemployment-593599

## SOLUTION This solution is FREE courtesy of BrainMass!

See the attached file.

We have,
An increase in cyclical employment will have no impact on the natural rate of unemployment and the potential GDP
If the structural employment decreases to 1.5% then in that case, natural rate of unemployment:
Natural Rate of Unemployment=Frictional unemployment+Structural unemployment+Seasonal unemployment
Or,
Natural rate of unemployment=2%+1.5%+0.5%=4.0%

We have,

When the economy is at point a then the economy is said to be having a expansionary gap, at this point prices are higher than expected price level where the SRAS intersects LRAS. Due to this an upward pressure would exists on nominal wages, prices, and real wages. This pressure would push the inflation upto the point b and then it will stop rising and this indicates that the inflation is temporary.

Now, when the economy is at point c then the economy is said to be having contractionary gap and at this point the prices are lower than the expected. Due to this there would be a downward pressure on nominal wages, real wages, and prices pushing inflation down temporarily until the economy reaches point d.
The three factors that can change potential output are:
Increase in resource availability
Improvement in technology
Production incentives that motivates to increase potential output
If the aggregate demand curve shifts to the right then in that case price level would increase but there would be no change in potential output but if the aggregate demand shifts to the right then in that case the price level would decrease and there would not be any change in potential output.

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