Multiple Choice
Suppose there was a large increase in net exports. If the Federal Reserve wanted to stabilize output, it could:
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1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
Which one of the following is NOT true when the economy is in macroeconomic equilibrium?
A
Firms have no incentive to change their level of output.
B
There is no tendency for the overall price level to change.
C
Aggregate demand equals aggregate supply.
D
Unemployment is always zero.
Verified step by step guidance1
Step 1: Understand the concept of macroeconomic equilibrium. This occurs when aggregate demand (AD) equals aggregate supply (AS), meaning the total quantity of goods and services demanded equals the total quantity supplied at the prevailing price level.
Step 2: Recognize that in macroeconomic equilibrium, firms have no incentive to change their output because the quantity they produce matches what consumers want to buy, so production is stable.
Step 3: Note that when AD equals AS, the overall price level tends to be stable, meaning there is no inherent pressure for prices to rise or fall, so the price level remains constant in equilibrium.
Step 4: Understand that while output and prices are stable in equilibrium, unemployment is not necessarily zero. There can still be natural unemployment due to factors like frictional and structural unemployment.
Step 5: Conclude that the statement 'Unemployment is always zero' is NOT true in macroeconomic equilibrium, because equilibrium does not imply full employment without any unemployment.
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