Question

If the unemployment rate is declining, the economy is likely experiencing which one of the following?

a. A recession

b. An expansion

c. A depression

d. A contraction

Which of the following best defines inflation?

a. The rapid increase in the price of a specific good, such as gasoline

b. A general, sustained upward movement of prices for goods and services in an economy

c. The fluctuation in revenue and expenditures caused by Congress and the president

d. An increase in the national debt caused by ongoing deficit spending

Answer 1

1. If the unemployment rate is declining, the economy is likely experiencing expansion. Expansion means that the economy is in recovery mode. When there is a business cycle recession, unemployment increases and when there is business cycle expansion, unemployment decreases. We say that an economy is recovering or expanding when there is an increase in the output, decrease in the unemployment rate and as a result of this a rise in inflation. Therefore the correct option is b.

2. Inflation is best defined as a general, sustained upward movement of prices and services in an economy. The purchasingpower of a currency falls due to inflation. During periods of inflation, the prices of goods and services increase. For an economy to run smoothly, the inflation rate must be kept under control by the Central Bank of that economy. Therefore the correct option is b.