During a Recession, How Does Output Relate to Its Potential

question 120

Multiple Choice

During a recession, how does output relate to its potential and unemployment relate to the natural rate?  

• A) Output is above potential, and unemployment is below the natural rate. 
• B) Output is above potential, and unemployment is above the natural rate. 
• C) Output is below potential, and unemployment is below the natural rate. 
• D) Output is below potential, and unemployment is above the natural rate.

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Definitions:

Rate of Inflation

The inflation of general prices for goods and services in an economy over a particular period of time.

CPI

A measurement known as the Consumer Price Index tracks the change in average costs for a variety of consumer goods and services, including but not limited to transportation, medical care, and food, through a weighted average formula.

Basket of Goods

A selected set of products and services used to measure changes in prices and inflation over time.

Deflation

A decrease in the general price level of goods and services, often indicative of a reduction in the supply of money or credit in the economy.