Zoltan Novak and Paul Smith, both residents of the country of East Paragon, are
ID: 2494862 • Letter: Z
Question
Zoltan Novak and Paul Smith, both residents of the country of East Paragon, are discussing whether the economy is operating at full employment. Zoltan, a market analyst, argues that with unemployment at 5.3 percent, the economy cannot possibly be fully utilizing all its resources. Paul, who is a journalist, disagrees based on a recent newspaper article that shows industrial production in East Paragon is at its highest level. This, he claims, is likely to indicate that the economy is operating at full employment.
Paul's argument is flawed because:
A. he assumes that industrial production is directly related to exports
B. he ignores the other components of aggregate expenditure
C. he assumes that the income tax is equal to zero
D. he does not take into account the marginal propensity to save in East Paragon
E. he assumes that production by firms in indicative of the state of the economy
Explanation / Answer
B. he ignores the other components of aggregate expenditure
There are various factors which affect the employment and unemployment rate of an economy. So, increase in industrial production does not mean there exist full employment in the economy.
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