When the economy is operating at an output rate less than full-employment capacity,
A) a strong demand for resources will cause resource prices to rise.
B) actual unemployment will be less than the natural rate of unemployment.
C) the rate of inflation will tend to rise.
D) weak demand for investment will place downward pressure on real interest rates.

Question

Quizplus · Accepted Answer

When the economy is operating below full-employment capacity, there is weak demand for investment which leads to downward pressure on real interest rates. This is because businesses and individuals are not demanding as much borrowing for investment purposes, so lenders must lower the interest rates in order to attract borrowers. This also means that the rate of inflation will not tend to rise, as there is not strong demand for resources causing resource prices to rise. Actual unemployment may or may not be less than the natural rate of unemployment, depending on other factors such as government policies and technological changes.

When the Economy Is Operating at an Output Rate Less