In an AD/AS diagram, an increase in structural unemployment will:
A) have no effect on AS or AD
B) sift AD to the left
C) shift AS to the right
D) shift AS to the left
The Correct Answer and Explanation is :
The correct answer is: D) shift AS to the left
Explanation:
In an Aggregate Demand/Aggregate Supply (AD/AS) model, structural unemployment relates directly to the potential output of the economy, influencing the Aggregate Supply (AS) side of the model. Structural unemployment occurs when there is a mismatch between the skills that workers in the economy can offer and the skills demanded by employers. This mismatch can be due to technological changes, changes in consumer preferences, or other factors that make certain jobs obsolete or require different skill sets.
When structural unemployment increases, it implies that fewer workers are effectively employable in the sectors where their skills are needed, leading to a decrease in the overall efficiency and productive capacity of the economy. This reduced productivity and efficiency translate into a lower total output at any given price level, which is represented in the AD/AS model by a leftward shift of the Aggregate Supply curve.
A leftward shift in the AS curve means that for each price level, the quantity of goods and services that the economy can supply has decreased. This shift can lead to higher prices for goods and services, known as cost-push inflation, as the reduced supply meets existing demand. Furthermore, the economy operates below its potential level of output, which exacerbates the problem of unemployment and can lead to a decrease in economic growth.
This leftward shift of the AS curve does not affect the AD curve directly, since AD is determined by other factors such as consumer spending, investment, government spending, and net exports. However, the overall economic impact of increased structural unemployment is a less productive economy with higher prices and lower output than would be possible if the unemployment were lower.
Image Generation:
Let’s generate an image of the AD/AS diagram showing the effect of an increase in structural unemployment, which shifts the AS curve to the left.
Here is the AD/AS diagram illustrating the effect of an increase in structural unemployment, which causes the Aggregate Supply (AS) curve to shift to the left. This shift demonstrates a decrease in the economy’s output at any given price level due to reduced productive capacity. You can see both the initial and the shifted positions of the AS curve, with the Aggregate Demand (AD) curve remaining unchanged.
