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

Quizplus · Accepted Answer

When an economy is not producing at its potential, it typically means there is underutilization of resources, such as labor, leading to unemployment above the natural rate. The government or central bank can take actions to stimulate the economy, but the average price level is not likely to rise in this scenario; it may actually fall due to decreased demand.

When an Economy Fails to Produce at Its Potential