The figure depicts the labor market when there has been a negative aggregate demand shock. Which of the following statements are correct?
Understand the Problem
The question refers to a labor market diagram, which is affected by a negative aggregate demand shock. It asks to identify the correct statement about the equilibrium level of unemployment, the new long-run equilibrium point, the levels of involuntary unemployment, and the demand-deficient unemployment based on the diagram.
Answer
The new long-run equilibrium is point B with N_B workers employed and N_L-N_X and N_L - N_B are the levels of involuntary unemployment at X and B, respectively.
The correct statements are:
- The new long-run equilibrium is point B with N_B workers employed.
- N_L-N_X and N_L - N_B are the levels of involuntary unemployment at X and B, respectively.
Answer for screen readers
The correct statements are:
- The new long-run equilibrium is point B with N_B workers employed.
- N_L-N_X and N_L - N_B are the levels of involuntary unemployment at X and B, respectively.
More Information
A negative aggregate demand shock shifts the aggregate demand curve to the left, leading to a decrease in both output and the price level. In the labor market, this translates to lower employment and potentially lower real wages, as firms reduce production and demand for labor.
Tips
When analyzing labor market diagrams, pay close the axis, and always note down any shift in the curves to analyze how the equilibrium changes. Also note the difference between involuntary, voluntary and demand-deficient unemployment.
Sources
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