When the Output Gap Is Negative, the Actual Unemployment Rate

question 183

Multiple Choice

When the output gap is negative, the actual unemployment rate is:

• A) above the natural rate.
• B) below the natural rate.
• C) equal to the natural rate.
• D) The actual and natural unemployment rates are not related to the output gap.

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Definitions:

Demand Curve

A graph showing the relationship between the price of a good and the quantity of that good consumers are willing and able to purchase at various prices.

Labor Supply Curve

A graphical representation showing the relationship between the wages offered and the quantity of labor workers are willing to supply.

Backward-Bending

A term often used in labor economics to describe the supply curve of labor, which can bend backwards at higher wage levels, indicating that higher wages can lead to a decrease in labor supply.

Substitution Effect

The economic principle that as the price of a good or service rises (or incomes decrease), consumers will replace pricier items with less costly alternatives, holding the utility derived from consumption constant.