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Question 27
We the figure kolow to answer the following question(s).
Ngure 10.17
Suppose an economy is currently eperating at output associated with , and , shown in Figure 10-17. Initially, the coutput of this economy is
(1) below its potential, and the rate of unemployment is greater than the natural rate.
(2) below its potential, and the rate of unemployment is less than the natural rate.
(3) above its potential, and the rate of unemployment is greater than the natural rate.
4. above its potential, and the rate of unemployment is less than the natural rate.

Ask by Boyd Reed. in Cayman Islands
Mar 31,2025

Upstudy AI Solution

Tutor-Verified Answer

Answer

The correct statement is (1): below its potential, and the rate of unemployment is greater than the natural rate.

Solution

To determine the correct statement regarding the economy’s output , we need to analyze the relationship between aggregate demand (AD) and short-run aggregate supply (SRAS) in the context of potential output.
Potential output is the level of output that an economy can produce when operating at full capacity, which corresponds to the natural rate of unemployment. If the economy is operating below potential output, it typically indicates higher unemployment, while operating above potential output suggests lower unemployment.
Based on the information provided:
  • If the economy is at output with and , we need to determine if is below or above potential output.
  • If is below potential output, the unemployment rate is greater than the natural rate.
  • If is above potential output, the unemployment rate is less than the natural rate.
    Without the figure, we can infer that if the economy is at output with and , and if it is stated that the output is below potential, then the correct option is (1): below its potential, and the rate of unemployment is greater than the natural rate.

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Bonus Knowledge

If an economy is operating at output with aggregate demand and short-run aggregate supply , we can deduce the conditions of the economy. When output is below potential output , it’s a sign of a recession, leading to a higher unemployment rate than the natural rate due to under-utilization of resources.
In practical terms, a situation where the economy operates below its potential typically leads to lower income levels, reduced consumer spending, and potential long-term impacts on economic growth. Policymakers might respond with stimulus measures to boost demand and reduce unemployment, striving to get back to that sweet spot of full employment.

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