In: Economics
According to Neo-Classical Economics, the capitalist economy is capable of achieving the full employment level of GDP with the natural rate of unemployment. Please explain how the economy adjusts itself to full employment equilibrium in the context of Neo-Classical Economics.
According to the Neo-classical theory of unemployment
(NAIRU)there is zero percent of inflation .whenever there is
disequilibrium in the economy that is whenever there is
underemployment in the economy the economy will try to reduce the
employment and restore the equilibrium level.
In Neoclassical theory the wages are adjusted quickly and always
ensures the output is at it's full employment level.The wages are
sticky .In neoclassical economics there is a natural rate of
unemployment and a vertical long run supply curve .whenever there
is disequilibrium in the economy the aggregate demand curve and the
the short run supply curves adjusts to bring the economy back to
equilibrium.
In the diagram given below the natural rate of unemployment takes
place at the point N*.It is the point where there is natural rate
of unemployment .In the given figure the equilibrium point is shown
at point A and the point of disequilibrium is at point B.