12.2 Business Cycles

How is real GDP calculated?

• By adding the prices of all goods and services produced

• By multiplying the quantity of goods and services produced

• By subtracting imports from exports

• By dividing total income by the population

At which point in the business cycle does the economy reach its lowest level of real GDP?

• Peak

• Expansion

• Trough

• Recovery

During which phase of the business cycle is real GDP rising?

• Trough

• Recovery

• Recession

• Contraction

How is a business cycle measured?

• From trough to trough

• From recovery to expansion

• From peak to peak

• From expansion to contraction

A lagging indicator is most likely to reach its high point at which stage of the business cycle?

• Before a peak

• At the same time as a peak

• After a peak

• Before a trough

Suppose the average weekly hours worked is increasing, stock prices are rising, and the money supply is expanding. Based on these leading indicators, what might an economist predict about the near future of the economy?

• The economy is likely to enter a downturn soon.

• The economy is likely to experience an upturn.

• The economy will remain unchanged.

• The economy is at its lowest point.

Explain how lower aggregate demand can lead to a contraction in the economy.

• Firms may fire workers, reducing income and spending, which causes the economy to fall

• Firms hire more workers, increasing income and spending, which causes the economy to grow

• The government increases spending, leading to higher aggregate demand

• The money supply increases, leading to more buying and expansion

After an election, why might congress want to reduce government spending?

• To increase aggregate demand

• To avoid inflation

• To boost exports

• To raise interest rates

Explain how government spending before and after elections can impact aggregate demand and inflation. (DoK Level 3: Strategic Thinking)

• Increased spending before elections raises aggregate demand, leading to more hiring, while reduced spending after elections lowers aggregate demand to avoid inflation.

• Increased spending before elections lowers aggregate demand, leading to less hiring, while reduced spending after elections raises aggregate demand to avoid inflation.

• Government spending has no impact on aggregate demand or inflation.

• Government spending only affects exports, not aggregate demand or inflation.

Suppose a country experiences a major supply shock. Using your understanding of economic principles, explain how this could impact the unemployment rate and real GDP.

• The unemployment rate increases and real GDP decreases.

• The unemployment rate decreases and real GDP increases.

• The unemployment rate and real GDP both remain unchanged.

• The unemployment rate increases and real GDP increases.