M43.1 – Aggregate Demand and Aggregate Supply by AC/DC Practice Test 2026 - Free Economic Practice Questions and Study Guide

When actual output is consistently below potential output, it indicates underutilization of resources within the economy, including labor and capital. This gap often leads to downward pressure on prices, commonly referred to as deflationary pressures. As businesses operate below capacity, they may reduce prices to stimulate demand, resulting in deflation or slowing inflation, which can further hinder economic recovery.

Persistently low output can also suggest that firms are unable to sell all their goods, leading to excess inventory and a reluctance to raise prices. Combined with stagnant wage growth due to underemployment, these factors create an environment where deflationary concerns are prominent, as consumers and businesses may anticipate falling prices in the future and delay spending or investment.

In contrast, the other outcomes like accelerated economic growth or significant increases in employment rates are less likely in a situation of underperformance relative to potential output. Instead, the economy faces challenges that restrict growth opportunities and employment stability.