Business cycles result when
A) aggregate demand grows faster than potential GDP.
B) the labor force participation rate changes.
C) aggregate supply and aggregate demand change at an uneven pace.
D) real GDP equals potential GDP.

Question

Quizplus · Accepted Answer

Business cycles occur when there are fluctuations in both aggregate supply and aggregate demand. These changes happen at different paces, leading to periods of economic expansion and growth, as well as periods of contraction and recession. Option A is incorrect because, during phases of economic growth, aggregate demand does exceed potential GDP, but this is only one part of the overall business cycle. Option B is incorrect because changes in the labor force participation rate do not necessarily cause business cycles. Option D is incorrect because if real GDP equals potential GDP, there is no growth or contraction in the economy, so a business cycle cannot occur.

Business Cycles Result When