Question

Which of the following describes the effect of the business cycle on the inflation rate and the unemployment rate? A. The unemployment rate increases and the inflation rate falls during expansions. B. The unemployment rate falls and the inflation rate falls during recessions. C. The unemployment rate increases and the inflation rate increases during expansions. D. The unemployment rate increases and the inflation rate falls during recessions. Why might the unemployment rate continue to rise during the early stages of a recovery? A. Employment growth may be slow relative to the growth in the labor force. B. The number of discouraged workers may continue to increase. C. Some firms continue to operate well below their capacity even after a recession has ended. D. Because both (a) and (c) are true.

Answer 1

Answer to part 1: D

Answer to part 2: D

Step-by-step explanation:

Part 1:

Inflation rate is the rate at which prices rise over time resulting in reduced purchasing power, that is loss of purchasing value per dollar spent. Unemployment rate is the percentage of unemployed workers in the total labour force of a given country. Business cycle expansion part of the cycle when the economy is growing whereas a recession is the part of the cycle when the economy is performing below its productive capacity. The inflation rate has an inverse relationship with the unemployment rate. Therefore, when inflation decreases, the unemployment rate increases and when inflation increases, the unemployment rate decreases. Given these principles and definition, unemployment would decrease during economic expansions and increase during recessions whereas inflation would increase during economic expansions and decrease during recessions. With this in mind, the correct answer to the first question is choice D

Part 2:

The period immediately following a recession is defined as economic recovery. it is also considered to be the first stage of economic expansion. During recovery, the productive capacity of the economy is just beginning to pick up and there is uncertainty regarding the sustainability of continued economic growth at that point in time. During this phase, national income may grow at a steady rate or experience some varied growth rates leading to some uncertainty at the firm level. Therefore, firms may be hesitant to take on new projects and employment opportunities may not be as many as the number of workers willing and available to work. Owing to this, some firms may be cautiously working below their full capacity. Choice D encompasses these two points.

Answer 2

The correct answer are option D for both questions.

Step-by-step explanation:

Recessions is characterized with decrease in consumer and investment spending. During recessions there is a decline in inflation rate and the unemployment rate increases.

While during expansion, there is a boost in economy. So, with increase in investment and production, the unemployment rate falls. There is a rise in inflation rate as well.

Though even in the stages of recovery, the unemployment rate continues to increase because some firms are pessimistic and are operating below their capacity. Also, the rate of growth of labor force is higher than rate of employment growth, which leads to increase in unemployment.