Question

Which of the following statements is true? a. The four phases of the business cycle, in order, are peak, recovery, trough, and recession. b. When unemployment is rising, then real GDP is rising. c. The economic problem typically associated with a recovery is rising unemployment. d. Full employment exists in an economy when the unemployment rate equals the sum of frictional and structural unemployment rates.

Short answer

d. Full employment exists in an economy when the unemployment rate equals the sum of frictional and structural unemployment rates.

Step-by-step solution

Understanding The Business Cycle Phases

The business cycle has four phases: expansion, peak, contraction (recession), and trough. An expansion sees overall economic growth and improved business activity, whereas, a peak marks the end of the expansion phase. The contraction phase (recession) witnesses a decline in economic growth and business activity, while the trough refers to the lowest point of a recession before a recovery begins.

Relation Between Unemployment and Real GDP

Unemployment rates and real GDP typically have an inverse relationship. When the unemployment rate is rising, real GDP is usually decreasing as fewer people are employed and contribute to economic growth. On the other hand, when the unemployment rate is declining, real GDP tends to increase as more people are employed, contributing to the economy's overall growth.

Recovery and Unemployment

During a recovery phase, the economy is improving after a recession, and businesses start hiring more employees. As a result, unemployment generally declines during a recovery.

Understanding Full Employment

Full employment occurs in an economy when all available labor resources are used most efficiently, and the unemployment rate is at its lowest possible level. Full employment does not mean zero unemployment because there will always be frictional and structural unemployment. Frictional unemployment refers to temporary unemployment experienced while transitioning between jobs. In contrast, structural unemployment results from a mismatch between the skills of job seekers and the requirements of available jobs. Now, let's go back to the given options and evaluate which statement is true. a. The order of phases is incorrect; the correct order is expansion, peak, contraction, and trough. b. This statement is false because an increase in unemployment generally leads to a decrease in real GDP. c. This statement is false because unemployment typically declines during a recovery. d. This statement is true, as it correctly defines the concept of full employment. So, the correct answer is:

Final Answer

d. Full employment exists in an economy when the unemployment rate equals the sum of frictional and structural unemployment rates.

Key concepts

Unemployment and GDP Relationship

The relationship between unemployment and Gross Domestic Product (GDP) is an essential concept in understanding an economy's health. Typically, these two elements are inversely related: when unemployment is high, GDP tends to be lower, and vice versa.

To break it down, GDP represents the total market value of all goods and services produced in an economy. High unemployment means fewer people are in the workforce, leading to a decrease in the economic output. When less is being produced, GDP falls, indicating an economic contraction.

On the flip side, when employment rises, so does the GDP, as more individuals are engaged in productive activities, therefore contributing to economic growth. This relationship highlights the critical role that employment plays in sustaining economic vitality.

Economic Phases

The economic cycle consists of several phases that indicate the overall state and direction of an economy.

• Expansion: This phase is characterized by increasing economic activity. Businesses expand, investments rise, and more jobs are created, leading to economic growth.
• Peak: At this point, the economy is at its highest point of activity, marking the end of an expansion period. Growth levels off, and inflation might become a concern.
• Contraction/Recession: Here, the economy sees declining activity. Business investments decrease, unemployment rises, and economic growth slows down.
• Trough: The lowest point of the economic cycle where the economy hits rock bottom, often paving the way for recovery.

Understanding these phases helps policymakers and economists devise strategies to manage economic activity effectively, ensuring stability and growth.

Full Employment

Full employment is a crucial concept in grasping labor economics and macroeconomic policy. It occurs when an economy effectively utilizes all available labor resources, with unemployment levels at the lowest sustainable point.

It's important to note that full employment doesn't mean having zero unemployment. It includes frictional and structural unemployment, which are natural and unavoidable.

• Frictional Unemployment: This is temporary, occurring when people are in between jobs or entering the workforce for the first time.
• Structural Unemployment: This results from a mismatch between workers' skills and the skills needed for available jobs, often requiring retraining or education.

Thus, full employment focuses on minimizing cyclical unemployment caused by economic downturns. Achieving full employment is a central goal for economic policymakers as it signifies a well-functioning and stable economy.