Question

Which of the following is true?

	a.	​ At the natural rate of unemployment, the economy is considered to be at full employment.
	b.	​ At full employment, the economy is producing at its potential output.
	c.	​ If unemployment is greater than its natural rate, the economy is producing at less than its potential output.
	d.	​ All of the above are true.

Answer 1

Answer. All of the above are true (d)

Natural rate of unemployment exist in a growing and healthy economy where cyclical unemployment (unemployment occurring at the time of recession or business cycle, where the situation continues from time to time) doesn't exist but frictional ((when people fund it difficult to find jobs or they change their jobs) and structural unemployments (unemployment due to the absence of demand for a certain type of job) do exist.

a. True

Full employment (those who are able and willing to work are employed) doesn't refer to 100% employment as it is not possible to employ all the factors. Natural unemployment is the situation of minimum or very less unemployment. So, under natural rate of unemployment, the economy is considered to be at full employment or minimum unemployment.

The diagram shows natural rate of unemployment (L* - L1) when there is minimum unemployment at equilibrium point.

b. True

When the abled and willing workers are employed in an economy, it's labor factors are fully optimised. The economy functions to its maximum potential and produces maximum output and cannot produce beyond the limit.

c. True

When actual unemployment >natural unemployment ➡️ less potential

Natural rate shows the minimum unemployment level. So, when the actual rate exceeds natural rate, it shows that the economy is producing below its potential limit.

Actual rate exceeds the natural rate during the period of recession where the economics activities are reduced and as a result GDP also reduces. This ultimately leads to rise in unemployment and the actual rate exceeds the natural rate. At this stage, economy's potential output falls and experiences less productivity.