Suppose the economy is self-regulating and the (actual)unemployment rate is less than the natural unemployment rate.This means that the economy is producing a level of output
A) above its natural level and will eventually cut back on output.
B) below its natural level and will eventually increase output.
C) below its natural level but no forces exist to automatically increase output.
D) above its natural level and institutional constraints will automatically be reduced so as to allow the economy to continue producing this level.
E) none of the above

Question

Quizplus · Accepted Answer

If the actual unemployment rate is less than the natural unemployment rate, it suggests that the economy is producing output at a level above its natural level. This is because the natural rate of unemployment is the rate of unemployment that exists when the economy is producing at its potential output level, which is the level of output at which there are no resource wastages. As the actual output level exceeds the potential level and the labor market tightens, firms start paying higher wages for the same level of output. This leads to higher production costs, lower profit margins, and eventual cutbacks in output by the firms. Therefore, the self-regulating forces of the market will reduce output and bring it back to the natural level where there is no excessive demand for labor and wages.

Suppose the Economy Is Self-Regulating and the (Actual)unemployment Rate Is