period of expansion and contraction of aggregate economic activity measured by real GDP is called a(n): a. Expansion
b. Recession
c. Circular flow
d. Business cycle
The correct answer and explanation is:
Correct Answer: d. Business cycle
The period of expansion and contraction of aggregate economic activity, as measured by real Gross Domestic Product (real GDP), is called a business cycle. The business cycle represents the natural rise and fall of economic growth that occurs over time. It includes four main phases: expansion, peak, contraction (also called recession), and trough.
During the expansion phase, the economy grows as businesses increase production, employment rises, consumer spending increases, and real GDP climbs. As the economy grows stronger, it reaches a peak, which is the point at which economic activity is at its highest. However, economies cannot grow indefinitely, and a slowdown eventually begins.
This slowdown leads to a contraction, also referred to as a recession if it becomes prolonged and severe. In this phase, production decreases, businesses may reduce their workforce, unemployment rises, and consumer spending tends to fall. Real GDP declines during this phase. The contraction continues until the economy hits a trough, the lowest point of economic activity in the cycle.
Following the trough, the cycle begins anew with another phase of expansion. These cycles do not follow a fixed schedule but are influenced by a wide range of factors, including changes in interest rates, government policies, technological innovations, and external shocks such as pandemics or international conflicts.
The business cycle is important because it affects employment, income levels, consumer confidence, and business investment. Policymakers, such as central banks and governments, use fiscal and monetary tools to try to smooth out the extremes of the business cycle and support economic stability. For example, during recessions, governments may increase spending or cut taxes to stimulate demand, while during periods of rapid expansion, central banks may raise interest rates to avoid inflation.