Principles of Economics 2e
Solutions
Principles of Economics 2e
Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model? Hint: How does structural unemployment affect potential GDP?
Impact of increase in structural unemployment on output level, price level and employment is to be determined.
This situation usually occurs when workers become unemployed when technology changes, workers are laid-off may be due to lack of skills.
This unemployment leads to decrease in Aggregate demand as output will fall. Higher the unemployment, lower will be the demand and lower will be the income. This means economy will be far away from potential GDP, measured by LRAS curve.
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