Show in the AS-AD model why an expansionary fiscal policy cannot apparently reduce the natural rate of unemployment

The AS-AD model, or Aggregate Supply-Aggregate Demand model, is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply. It's used to illustrate the effects of fiscal and monetary policy, among other things.

Step 1: Understanding the AS-AD Model In the AS-AD model, the aggregate supply curve (AS) and the aggregate demand curve (AD) intersect to determine the equilibrium price level and the level of output in the economy. The AS curve shows the total quantity of goods and services that firms are willing and able to supply at different price levels, while the AD curve shows the total quantity of goods and services that households, firms, and the government want to buy at each price level.

Step 2: Understanding the Natural Rate of Unemployment The natural rate of unemployment is the rate of unemployment that the economy tends to gravitate towards in the long run, given the existing institutional and economic structure of the economy. It's the rate of unemployment that exists when the economy is in equilibrium, with no cyclical or deficient-demand unemployment.

Step 3: Expansionary Fiscal Policy Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic activity. This policy shifts the AD curve to the right, leading to an increase in the equilibrium level of output and price level.

Step 4: The Effect on Unemployment In the short run, this increase in demand may lead to a decrease in unemployment as firms hire more workers to meet the increased demand for their products. However, in the long run, the economy will return to the natural rate of unemployment. This is because, in the long run, the AS curve is vertical, indicating that the level of output is determined by the economy's productive capacity, not the price level. Therefore, while expansionary fiscal policy can temporarily reduce unemployment, it cannot reduce the natural rate of unemployment.

Step 5: Conclusion In conclusion, an expansionary fiscal policy cannot apparently reduce the natural rate of unemployment because, in the long run, the level of output and thus employment is determined by the economy's productive capacity, not by the level of aggregate demand. The natural rate of unemployment is determined by structural factors in the economy, such as the level of frictional and structural unemployment, which cannot be affected by fiscal policy.