Which statement is NOT true of full-employment output (y*)?

• A. It is also referred to as potential output.
• B. It represents the level of output when all resources are used efficiently.
• C. It occurs when the unemployment rate is zero.
• D. It is the maximum sustainable output an economy can produce without causing inflation.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of full-employment output (y*). It is the level of output an economy can produce when all available resources (labor, capital, etc.) are used efficiently, but without causing inflationary pressure.
2. Step 2: Recognize that full-employment output is also called potential output, which reflects the sustainable maximum output level over the long term.
3. Step 3: Note that full-employment output does not imply zero unemployment. Instead, it corresponds to the natural rate of unemployment, which includes frictional and structural unemployment but excludes cyclical unemployment.
4. Step 4: Understand that full-employment output is the maximum sustainable output an economy can maintain without accelerating inflation, meaning it balances resource use and price stability.
5. Step 5: Identify the incorrect statement by comparing each option to these definitions. The statement claiming full-employment output occurs when the unemployment rate is zero is false because some unemployment always exists even at full employment.