Short-Run Equilibrium Below Potential Output: Implications for the Economy

Short-Run Equilibrium Below Potential Output

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Question

When the economy is in short-run equilibrium below potential output, then

Answers

A. actual unemployment will be greater than the natural unemployment.

B. the natural unemployment will decline.

C. the economy will be unable to sustain output in the long run.

D. actual unemployment will be less than the natural unemployment.

E. a strong demand for resources will place upward pressure on resource prices.

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Explanations

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A. B. C. D. E.

An equilibrium below potential output implies that demand for labor and other resources is weak. This implies that the actual rate of unemployment will be greater than the natural rate since the natural rate prevails when the economy is operating at full employment.

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