Question

What is the Natural Rate of Unemployment? And how does its rise affect output in the AD/AS Model? (Hint: draw figure and show shifts

Answer 1

Natural rate of Unemployment is the rate at which unempoyment causes from the actual or voluntary economic or supply forces. Natural rate of unemployment is the equilibrium rate of unemployment. In the below figure ,LRAS,SRAS, AD, Y,P shows Long run aggregate supply curve, short run aggregate supply curve, Aggregate Demand, Output and employment , Price respectively. If natural rate of unemployment rises Aggregate Demand shift upward from AD to AD2 then SRAS shift to upward to SRAS1 then PRICE rise then demand shift leftward and output and uneployment reduced from y2 to y that is at long run equilibrium output and in that point change in unemployment is less than natural rate of unemployment in that pointinflation will be freezed in long run that is called Non-Accelerating Inflation Rate of Unemployment (NAIRU ). Which means after that if increase inflation, firm can produce specific level of output. Natural rate of unemployment means a minimum level of unemployment will exist in aconomy due to supply forces that will corrected by demand forces or economic system.