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Which of the following statements about contractions is true? a
Which of the following statements about contractions is true?
a. Significant or prolonged contractions are called booms.
b. A contraction usually follows a trough in the business cycle.
c. Contractions are periods when the real GDP grows slower than the trend.
d. The government usually does not have a part in moderating the business cycle when a contraction is occurring.
Expert Solution
Booms and busts refer to the ups and downs respectively. A boom is a period of expansion, not contraction. A trough is the bottom of a cycle and an economic contraction starts several months or years before the economy hits a trough. Once it hits a trough, by its very definition, the economy starts to recover and grow again. During contractions, real GDP is not growing. It is actually declining in size. Also, the government can play a role in moderating the contraction through expansionary fiscal and monetary policy whereby it can lower taxes and lower interest rates to boost demand. None of the statements is therefore correct.
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