Question

define unemployment, explain where it comes from (aggregate demand or aggregate supply shock?).

Answer 1

Unemployment is defined as a condition when people who are willing to work at the ongoing wage are unable to find a job. A person is not considered as unemployed when he just does not have a job because he does not want one. Broadly there are two types of unemployment - voluntary (when one chooses not to have a job) and involuntary (willing to work but no job). In the classical sense, involuntary unemployment is true unemployment and is what causes economic recession.

Unemployment is the result of an aggregate demand shock. When there is a deficit of aggregate demand, the real GDP falls. As less gets produced due to lack of demand, less amount of labor is to be employed and so some workers have to be laid off due to the AD shock. This causes involuntary unemployment and people who previously had a job loose their jobs.

Note - AS shocks can also cause unemployment but they are voluntary and temporry in nature in nature like frictional unemployment/ seasonal unemployment and is not considered to cause unemployment in the true sense.