To understand business cycles, we need a model that does not guarantee always-full employment because
A) business cycles are fluctuations in actual output, not potential output.
B) business cycles are fluctuations in potential output, not actual output.
C) business cycles are fluctuations in the natural rate of inflation, not the actual rate of inflation.
D) business cycles are fluctuations in actual net exports, not potential net exports.

Question

Quizplus · Accepted Answer

Business cycles are characterized by fluctuations in actual output (or GDP), not potential output. During a business cycle, the economy can experience periods of both expansion (where actual output is above potential output) and contraction (where actual output is below potential output). This variability in actual output relative to potential output is what necessitates a model that does not assume always-full employment, as full employment would imply that actual output always equals potential output, which is not the case during business cycles.

To Understand Business Cycles, We Need a Model That Does