When the output gap is negative, the actual unemployment rate is:
A) above the natural rate.
B) below the natural rate.
C) equal to the natural rate.
D) The actual and natural unemployment rates are not related to the output gap.

Question

Quizplus · Accepted Answer

When the output gap is negative, it means that the actual output is below potential output. This indicates that there is deficient demand in the economy, which leads to a decrease in aggregate demand and ultimately, in employment. Therefore, the unemployment rate will be higher than the natural rate.

When the Output Gap Is Negative, the Actual Unemployment Rate