When the economy is creating less output than its potential, it means:
A) there are some resources that are unemployed.
B) the economy is in an economic boom.
C) contractionary policy needs to be enacted.
D) governments are likely to reduce their spending.

Question

Quizplus · Accepted Answer

When the economy is creating less output than its potential, it means that there are some resources that are unemployed. This includes labor, capital, and natural resources that are not being fully utilized in the production process. This situation is known as a recessionary gap, and it can be addressed through expansionary fiscal or monetary policy to stimulate economic growth and reduce unemployment. B and D are incorrect because an economic boom is a period of high economic growth and activity, and reducing government spending may exacerbate the recessionary gap. C is also incorrect because contractionary policy would further decrease output and worsen the recessionary gap.

When the Economy Is Creating Less Output Than Its Potential