Question

Most economists agree that the immediate cause of most cyclical changes in real output and employment is an unexpected change in ___________________.

1. the level of total spending

2. the value of the stock market

3. the value of the trade deficit

4. the unemployment rate

Short answer

Option (a): the level of total spending

Step-by-step solution

Explanation for the correct option (a)

Total spending refers to the expenditure on private consumption, gross investment, government purchases, and net exports.When these components of aggregate demand change unexpectedly, the difference in real output and employment results in business cycles of boom or recession.

For example, during a recession, the total spending reduces, which means reduced demand for goods and services. As a result, inventories start piling up, and investment and production decline. The firms hire fewer people or fire some of their employees, which leads to an increase in unemployment.

Explanation for the incorrect options

The value of the stock market is a financial concept. It does not alter the real variables like output and employment of an economy.

The value of the trade deficit is related to the import and export. When an economy’s imports exceed its exports, a trade deficit occurs. The trade deficit has no impact on real output and employment. Real output and employment can indirectly affect the trade deficit.

The unemployment rate is the percentage of employed individuals out of the total labor force. Unemployment itself is a result of the cyclical changes in an economy. It cannot change the real output and employment.