When an economy fails to produce at its potential,
I. there may be actions that the government or the central bank can take to push the economy toward its potential.
II. the unemployment rate is below its natural rate.
III. the average price level is likely to rise.
A) I, II, and III
B) I and II only
C) I and III only
D) I only

Question

When an economy fails to produce at its potential, 
I. there may be actions that the government or the central bank can take to push the economy toward its potential.
II. the unemployment rate is below its natural rate.
III. the average price level is likely to rise.
A) I, II, and III
B) I and II only
C) I and III only
D) I only

Quizplus · Accepted Answer

When an economy fails to produce at its potential, it often means there is underutilization of resources, such as labor, leading to unemployment above the natural rate, not below. Additionally, the average price level is more likely to fall or remain stable rather than rise due to decreased demand. However, government or central bank interventions can help push the economy toward its potential.

When an Economy Fails to Produce at Its Potential