The document discusses various types of unemployment like frictional, structural and cyclical unemployment. It also examines classical economic models of aggregate demand, aggregate supply and how they interact to determine equilibrium output and price levels in an economy. Shifts in aggregate demand and supply curves are explained by factors like government spending, investment, exports and productivity.

1. Upper Six Unit 2 Module 1 Topic 2

3. Types of Unemployment Frictional Structural Cyclical Voluntary Normal Residual Seasonal

4. Classical Model Unemployment is a result of wages being too high Employers will not employ workers requiring wages above equilibrium level The demand for labour in the economy is a function of the marginal physical product of labour MPP decreases as more workers enter the labour market The supply of labour increases as wages rise

5. Quantity of labour Real Wage D L S L Unemployed 0 L2 L1 L3 W/P1 W/P2

6. Aggregate Demand Total spending on goods and services in an economy C + I + G + (X – M) Curve

7. C+I+G+(X-M) Consumer spending – amount consumers spend on goods, dependent on level of disposable income Investment spending – expenditure by private sector on capital goods, affected by interest rates, technological change, expectations Government spending – current and capital spending on public services Net Exports – difference between exports and imports

8. AD Curve AD AD Real GDP Price level Slopes downward from left to right because a lower price will: Raise demand for net exports Increase purchasing power of households Encourage bank lending Movement along curve AD2 AD2 If any of the components of AD change for a reason other than price it will result in a shift. This could result due to: A rise in expectations about the future A cut in direct tax An increase in the money supply A fall in the exchange rate A rise in the quality of domestic goods

9. Aggregate Supply Total output that firms in an economy are willing and able to supply at different price levels in a given period of time SRAS LRAS

10. Short run Aggregate Supply Slopes upwards from left to right – higher prices mean ability to meet costs and greater profits Shifts if productivity changes or payments to fop change

11. Long run Aggregate Supply Output firms produce after price level and factor prices have fully adjusted after any shift in aggregate demand. Keynesians illustrate LRAS as perfectly elastic at low levels of output, then upward sloping over a range of output and finally perfectly inelastic – in the long run the firm can operate at any level of output and not necessarily at full capacity. New Classicals illustrate LRAS as vertical The LRAS shifts due to changes in quality and quantity of resources eg. Education, net migration, technology

12. LRAS (Keynesian) LRAS Q1 Q2 Real GDP Price level 0

13. LRAS (Classical operating at full capacity) Real GDP Price level Q 0

14. AD and AS AD AS Q P Real GDP Price level AD1 AS1

15. Great Work Show your understanding by doing some questions