If output is at its full-employment level, then
A)the actual unemployment rate is zero
B)the natural rate of unemployment is zero
C)there are no frictions in the labor market since wages have reached their market-clearing level
D)there is still some positive level of unemployment due to frictions in the labor market
E)nobody who is currently employed is looking for a new job

Question

Quizplus · Accepted Answer

Even when output is at its full-employment level, there may still be some level of unemployment due to frictions in the labor market such as workers needing time to search for and match with new jobs, or structural mismatches between available jobs and the skills of the workforce. This level of unemployment is known as the natural rate of unemployment, which is typically not zero. Thus, choice D is the best answer. Choices A, B, and E are incorrect because they assume that the actual unemployment rate is zero or that there is no frictional unemployment at full employment, which is not always the case. Choice C is incorrect because the market-clearing level of wages does not necessarily eliminate all frictions in the labor market.

If Output Is at Its Full-Employment Level, Then