If an economy is operating at short-run equilibrium below the level of real GDP, the self-correction model result is that:
A) unemployment increases.
B) unemployment falls.
C) cyclical unemployment increases.
D) frictional and structural unemployment increase.

Question

Quizplus · Accepted Answer

In the self-correction model, if an economy is operating at short-run equilibrium below the level of real GDP, it implies that there is a recessionary gap. In the long-run, market forces will adjust to close this gap, which will result in an increase in aggregate demand and a decrease in unemployment, leading to an eventual return to potential output level. Hence, option B is the correct choice as unemployment falls.

If an Economy Is Operating at Short-Run Equilibrium Below the Level