The figure depicts the labour market when there has been a negative aggregate demand shock. Which of the following statements are correct?
Understand the Problem
The question requires understanding how a negative aggregate demand shock impacts the labor market, as depicted in the provided graph. We need to determine which statement about the equilibrium, unemployment levels, and the effects of the shock is correct based on the shifts in the wage-setting and price-setting curves.
Answer
The equilibrium level of unemployment is N_L - N_B
The equilibrium level of unemployment is N_L - N_B
Answer for screen readers
The equilibrium level of unemployment is N_L - N_B
More Information
The equilibrium level of unemployment represents the difference between the labor force (N_L) and the number of workers employed (N_B) after the negative aggregate demand shock.
Tips
A common mistake includes confusing the equilibrium level of unemployment with involuntary unemployment, which is the unemployment at a specific point (X or B) due to the wage being above the equilibrium wage.
Sources
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