If potential output is higher than actual output, then the unemployment rate is:
A) below the natural rate.
B) above the natural rate.
C) equal to the natural rate.
D) zero.

Question

Quizplus · Accepted Answer

If potential output is higher than actual output, it means that there is a gap between what the economy can produce and what it is producing, and this suggests that the economy is not operating at its full capacity. This also means that the labor market is not fully employed and there is an excess supply of labor, leading to higher unemployment rates. Therefore, the unemployment rate is above the natural rate.

If Potential Output Is Higher Than Actual Output, Then the Unemployment