Use the following to answer questions .
Exhibit: Fiscal Policy 1
-(Exhibit: Fiscal Policy 1) At output level Y₁,

Question

Use the following to answer questions . Exhibit: Fiscal Policy 1 -(Exhibit: Fiscal Policy 1) At output level Y₁,

Quizplus · Accepted Answer

At output level Y₁, potential output (YS) is greater than actual output (Y1), indicating that the economy is not operating at its full potential. This suggests that there is a cyclical unemployment (unemployment due to the business cycle) and the actual unemployment rate is higher than the natural rate of unemployment. Therefore, the correct option is A. Option B is incorrect as the production possibilities curve represents the maximum output that can be produced with the given resources and technology. Option C is incorrect as the actual unemployment rate is higher than the natural rate of unemployment. Option D is incorrect as aggregate demand will need to increase to restore equilibrium and move towards potential output.

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