When the actual rate of unemployment is less than the natural rate of unemployment, the economy
A) operates at an output greater than its long-run potential.
B) operates at its maximum sustainable output.
C) must also be experiencing stable prices (zero inflation).
D) operates at an output less than its long-run potential.

Question

Quizplus · Accepted Answer

When the actual rate of unemployment is less than the natural rate of unemployment, there is a shortage of available workers and businesses must compete to hire them, leading to wage increases and higher prices. This increases the overall level of economic activity, but also leads to inflationary pressure and a potential overheating of the economy. As a result, the economy is operating at an output greater than its long-run potential, as it cannot sustain this level of activity without causing inflation.

When the Actual Rate of Unemployment Is Less Than the Natural