Which of the following statements are INCORRECT?

A. "When expectations about the future demand are low, this may lead to low-capacity utilisation for firms."

B. "When faced with income shocks, households may not be able to smooth their consumption due to credit market exclusion that hinders their ability to borrow."

C. "In the case of a decrease in aggregate demand that brings equilibrium output below potential, there is no need of central bank intervention as there is no inflationary pressure in the economy."

D. "When the economy is at its potential output, actual unemployment is equal to equilibrium unemployment"

Can have more than 1 answer

C. "In the case of a decrease in aggregate demand that brings equilibrium output below potential, there is no need of central bank intervention as there is no inflationary pressure in the economy."

Discussion

The twin duty of most central banks is to preserve price stability while also promoting full employment. To achieve these two goals, central banks use the money supply. When a central bank adjusts the money supply, interest rates adjust as well, and interest rate changes affect investment and aggregate demand. A drop in the money supply is accompanied by a corresponding decrease in nominal output, also known as GDP (GDP). Furthermore, a reduction in the money supply will result in a reduction in consumer expenditure. The aggregate demand curve will move to the left as a result of this decline.

D. "When the economy is at its potential output, actual unemployment is equal to equilibrium unemployment"

Discussion

Full employment and potential real GDP are two more key notions that are related to the natural rate of unemployment. When the actual unemployment rate equals the natural rate, the economy is said to be at full employment. Real GDP equals potential real GDP when the economy is at full employment. When the economy is not at full employment, however, the unemployment rate is higher than the natural rate, and real GDP is lower than potential. Finally, when the economy is at or near full employment, the unemployment rate is lower than the natural rate, and real GDP exceeds potential. Because it is akin to employees working overtime, operating above potential is only possible for a limited time.