Full-employment output is the level of output that firms in the economy supply when
A)taxes are zero.
B)wages and prices have fully adjusted.
C)the unemployment rate is zero.
D)all capital is fully utilized.

Question

Quizplus · Accepted Answer

Full-employment output is the level of output at which firms in the economy supply goods and services when wages and prices have fully adjusted to market conditions. At this level of output, the economy is operating at full employment, which means there is no cyclical or demand-deficient unemployment. However, it is possible to have some level of frictional, structural or seasonal unemployment at full employment output, as those types of unemployment are not related to the business cycle or deficiency in aggregate demand. Choice A is incorrect because taxes have no direct impact on the level of output an economy can produce. Choice C is incorrect because full employment output does not imply zero unemployment rate, but rather that cyclical unemployment is absent. Choice D is incorrect because full employment output is not contingent on full utilization of capital, but rather on the full utilization of labor and other productive resources in the economy.

Full-Employment Output Is the Level of Output That Firms in the Economy