When the economy is operating at an output beyond its full-employment potential, the
A) actual level of unemployment will exceed the natural rate of unemployment.
B) actual level of unemployment will equal the natural rate of unemployment.
C) strong demand for resources will place upward pressure on resource prices.
D) aggregate demand will increase until full employment is restored.

Question

Quizplus · Accepted Answer

When the economy is operating beyond its full-employment potential, it is operating at a level above its potential output. This means that the resources in the economy are being used at a level beyond their sustainable level. As a result, the demand for resources becomes strong, and this places upward pressure on resource prices. Therefore, option (C) is correct. Option (A) is incorrect because operating beyond full-employment potential means that the actual level of unemployment is below the natural rate of unemployment. Option (B) is incorrect because the actual level of unemployment will always be below the natural rate of unemployment when the economy is operating at a level beyond its full-employment potential. Option (D) is incorrect because operating beyond full-employment potential means that the economy is already producing at a level beyond its maximum potential output, therefore, increasing aggregate demand will not restore full employment.

When the Economy Is Operating at an Output Beyond Its