Question

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.

Answer 1

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.