The following graph approximates business cycles in the United States from Janua

Question

The following graph approximates business cycles in the United States from January 1973 to January 1983. (Note: This problem uses U.S. data rather than Australian data since the United States economy experienced more fluctuations during this time and, thus, serves as a better illustration for this question.) The vertical blue bars coincide with periods of six or more months of declining Real Gross Domestic Product (real GDP) REAL GDP (Billions of dollars 5500 5200 4900 4600 4300 4000 973 1975 1977 1979 1981 1983 YEAR Notice that real GDP trends upward over time but experiences ups and downs in the short run. A period of declining real GDP, such as the blue-shaded period in 1980, is known asa a recession True or False: The small ups and downs in real GDP appear to follow a consistent, predictable pattern during this period. O True O False

Explanation / Answer

(a) The first answer, recession, is absolutely right.

(b) Business cycles follow a highly inconsistent pattern. They are also highly unpredictable. There is a famous quip: Economists have successfully predicted nine of the last five recessions.

(c) In late 1981 and early 1982, the US economy experienced recession due to the second price shock. So ofcourse, this led to fall in car sales, corporate profits, real income. And as profit opportunities fell, investment spending also fell. Your answer is again absolutely right.

(d) Since real GDP (i.e., production) declined in 1974, the unemployment rate also fell. You answer is absolutely right yet again.

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