When output is less than the economy's long-run capacity, which of the following is most likely to occur?
A) an abnormally low rate of unemployment
B) reductions in real interest rates and real resource prices
C) a sharp increase in imports
D) a government budget surplus

Question

Quizplus · Accepted Answer

When output is less than the economy's long-run capacity, there is excess capacity and resources are underutilized. This usually leads to a decrease in real interest rates and real resource prices as there is less demand for these resources. Option A is not likely to occur as there is excess capacity, which means there are more resources than are needed, leading to increased unemployment. Option C is not likely to occur as the economy is not producing enough to meet domestic demand, let alone imports. Option D is not likely to occur as there are less than optimal levels of economic activity and tax revenues are usually low, leading to budget deficits not surpluses.

When Output Is Less Than the Economy's Long-Run Capacity, Which