Macroeconomics

Where the answer comes from: on the graph, point C lies on the falling part of the curve, after the highest point (B) and before the lowest point (D).

Step by step:

1. The four phases of the business cycle are: expansion (output rising), peak (the top), contraction (output falling), and trough (the bottom).
2. At C, real GDP is going down. That is a contraction. When a contraction is significant and lasts more than a few months, it is called a recession.
3. B is the peak and D is the trough, so C cannot be either one. A and E are on rising sections, which are expansion.

Answer: contraction.

During a contraction, businesses produce less, many cut workers, and unemployment usually rises.

Tip: on a business-cycle graph, look at the direction of the line at the point: rising = expansion, falling = contraction, top = peak, bottom = trough.

Apply the definition: to count in U.S. GDP, an item must be (1) newly produced this year, (2) produced within U.S. borders, and (3) a final good or service bought in the market.

Step by step:

1. A new pickup truck built in Michigan and sold to a family this year — new, made in the U.S., final product sold in the market. ✔ Counted.
2. A used car built in 2015 — it was counted in GDP the year it was made. Reselling it does not create new production.
3. Shares of stock — buying stock is a financial trade (a change of ownership), not production of a good or service.
4. A shirt made in Vietnam — produced outside U.S. borders, so it counts in Vietnam's GDP. In U.S. data, it is an import.

Answer: a new pickup truck built in Michigan and sold this year.

Tip: GDP measures production, not sales of used things or paper assets. "Domestic" means where it was made, not who owns the company.

Data: CPI rose from 292.7 (2022) to 304.7 (2023). Inflation was about 8.0% in 2022 and about 4.1% in 2023.

Step by step:

1. Check the direction of prices: 304.7 is higher than 292.7, so prices still rose in 2023.
2. Check the speed: \dfrac{304.7 - 292.7}{292.7} \times 100 \approx 4.1\%, about half the 2022 rate. Prices rose more slowly.
3. A slowdown in the inflation rate is called disinflation. A fall in the price level itself is deflation—which did not happen, because the CPI went up.
4. "Prices returned to 2021 levels" is false (271.0 in 2021 vs. 304.7 in 2023). "Prices rose faster" is false (4.1% < 8.0%).

Answer: Prices continued to rise, but at a slower rate than in 2022.

Tip: a falling inflation rate does not mean falling prices. Picture a car slowing from 80 to 40 mph—it is still moving forward.

Evidence: paragraph 4: "To fight high inflation, the Fed raises interest rates. Higher rates make borrowing more expensive, so households and businesses spend less, and the slower spending eases the pressure on prices."

Step by step (the chain):

1. The Fed raises interest rates.
2. Loans for cars, homes, credit cards, and businesses cost more (paragraph 3 explains how the federal funds rate "ripple[s] out" to these rates).
3. People and businesses borrow and spend less.
4. With less spending chasing the same goods, prices rise more slowly.

Why the others are wrong:

• Raising taxes is fiscal policy (Congress), not something the Fed does.
• Cheaper borrowing comes from lowering rates—the recession tool.
• The Fed does not set store prices directly; the passage never says it does.

Answer: Borrowing becomes more expensive, so people and businesses spend less, which eases pressure on prices.

Tip: for "how" questions, look for a cause-and-effect chain in the text and pick the choice that keeps every link in the right direction.

Evidence: paragraph 2: "Westland's steel mills, which had struggled to compete, raise their own price to $950 per ton and still win many new customers. The mills hire 2,000 additional workers."

Step by step:

1. A tariff makes imported goods more expensive (here, $800 → $1,000 per ton).
2. That helps domestic producers of the same good. Westland's mills can charge more ($950) and still be cheaper than imports, so they gain customers and hire workers.
3. Car makers lose: paragraph 3 says they "pay more" for steel, raise car prices, and some hire fewer workers.
4. Soybean farmers lose: paragraph 4 says other countries retaliated, making it "harder to sell their crops abroad."
5. Car buyers lose: they face higher car prices.

Answer: Westland's steel mills and their workers.

Tip: tariffs create winners (domestic producers of the protected good) and losers (consumers, industries that use the good as an input, and exporters hit by retaliation). Look for both sides in the passage.

Evidence: paragraph 2: importers "passed the full cost on to stores: an imported machine now costs stores $500." Paragraph 3: Brightwash "raised its price to stores to $480," and "appliance stores raised the prices they charge shoppers for both imported and Brightwash machines."

Step by step:

1. The tariff raised the price of imported machines from $400 to $500.
2. With less competition from imports, Brightwash could raise its own price from $450 to $480.
3. Stores passed these increases on, so families shopping for a washing machine pay more whichever brand they choose.

Who gained instead: Brightwash's owners (higher price, more sales) and its workers (400 new jobs) benefited, and Aldera's government collected the tariff revenue.

Answer: families in Aldera shopping for a new washing machine.

Check: the apple growers were also hurt, but by Kestland's response (paragraph 4), which the question excludes.

Tip: a tariff is a tax on imports. It usually helps the domestic producers it protects and hurts the domestic buyers of that product.

Data from the table: price index Year 3 = 219.4; Year 4 = 217.2.

Step by step:

1. The index went down: 217.2 − 219.4 = −2.2 points.
2. −2.2 ÷ 219.4 ≈ −0.010, so the average price level fell about 1%.
3. A general fall in prices is deflation.
4. When prices fall, each dollar buys a little more, so purchasing power rises.

Answer: prices fell by about 1% on average, so a dollar bought slightly more than in Year 3.

Check: in every other year the index rose. Year 4 is the only year when the basket cost less than the year before.

Tip: do not confuse disinflation (prices still rising, but more slowly—Calloway's Year 3) with deflation (prices actually falling—Year 4). Look at whether the index itself went up or down.

Evidence: paragraph 2: "A tax cut leaves households with more take-home pay. When households spend that extra money at stores and restaurants, businesses sell more, and they hire more workers to keep up with demand."

Step by step — the chain:

1. Taxes go down → households keep more of their pay.
2. Households spend more.
3. Businesses sell more.
4. Businesses hire more workers → unemployment falls.

Answer: households have more take-home pay to spend, so businesses sell more and hire more workers.

Why the others fail: lower interest rates are a monetary tool described nowhere in paragraph 2; the government hiring workers directly would be a spending increase, not a tax cut; and the passage never says businesses are required to hire.

Check: the correct choice uses each link in the paragraph in order, with nothing added.

Tip: for cause-and-effect questions, trace the passage's chain link by link. A choice that skips links or brings in a different tool is a trap.

Data: real GDP is lowest at Q7 (398) and rises from Q8 on. Unemployment is highest at Q8 (6.3%), then falls to 6.0% (Q9) and 5.4% (Q10).

Check each choice:

1. "Highest unemployment in the same quarter as lowest GDP" — no: GDP bottomed in Q7, unemployment peaked in Q8. ✘
2. "Unemployment kept rising for one quarter after real GDP began to recover" — GDP rose from 398 to 401 in Q8, but unemployment rose from 5.8% to 6.3%. ✔
3. "Real GDP fell in every quarter that unemployment rose" — unemployment rose in Q8, when GDP rose. ✘
4. "By Q10 both had returned to Q1 levels" — GDP (418) passed its Q1 level of 400, but unemployment (5.4%) is still above 4.2%. ✘

Answer: unemployment kept rising for one quarter after real GDP began to recover.

Why this happens: employers often wait to see whether a recovery will last before hiring again, so unemployment is a lagging indicator.

Tip: when a question pairs two data sets, line them up quarter by quarter and test each claim against both.

Data: GDP growth went from −2.6% in 2009 to +2.7% in 2010. Unemployment went from 9.3% to 9.6%, then fell to 8.9% in 2011.

Step by step:

1. Output began growing again in 2010 (the recession officially ended in June 2009), but unemployment kept rising for another year before falling in 2011.
2. This happens because employers are cautious after a recession. They first get more work out of existing staff, add hours, and wait to be sure demand will last before hiring. So unemployment is a lagging indicator—it changes after the economy has already turned.
3. Wrong choices: GDP did not fall in 2010 (it rose 2.7%). Unemployment did not rise because the economy was growing too fast—the economy was recovering from a deep slump. And unemployment did start to fall in 2011, so it did not "keep rising."

Answer: Employers often wait until a recovery is well under way before hiring, so unemployment can keep rising after output starts to grow.

Tip: in tables with two series, compare the timing of turning points. The GED rewards noticing that one variable moves before the other.

Data: in 2009, real GDP fell 2.6% and unemployment jumped to 9.3%—clear signs of a recession.

Step by step:

1. Diagnose the problem: shrinking output + rising unemployment = recession.
2. The excerpt gives the recession tools: fiscal policy—increase spending or cut taxes; monetary policy—the Fed lowers interest rates.
3. Only one choice uses both expansionary tools.
4. This matches history: by December 2008 the Fed had cut its key rate to nearly zero, and in February 2009 Congress passed a stimulus of roughly $800 billion.

Why the others are wrong: raising rates and cutting spending are tools to cool an overheating economy (anti-inflation), which would deepen a recession. Mixing one expansionary and one contractionary tool works against itself.

Answer: Congress increases spending, and the Federal Reserve lowers interest rates.

Tip: two-step policy questions: (1) diagnose—recession or inflation? (2) prescribe—expansionary for recession, contractionary for inflation.

Evidence: paragraph 1: monetary policy "is run by the Federal Reserve, the nation's central bank, which influences interest rates and the amount of money in the economy." Fiscal policy is "how much the federal government spends and how much it collects in taxes."

Check each choice:

• The Treasury sells bonds to pay for a budget deficit — this is the government borrowing to pay for its spending, part of the fiscal side. It sounds like a money tool, which is the trap. ✘
• Congress extends unemployment benefits — a spending decision by Congress → fiscal. ✘
• The Federal Reserve buys bonds from banks, adding money to the banking system — the central bank changing the amount of money → monetary. ✔
• The President proposes a budget with more highway spending — spending → fiscal. ✘

Answer: the Federal Reserve buys bonds from banks, adding money to the banking system.

Tip: "bonds" appear in both kinds of policy. When the Treasury issues bonds, the government is borrowing to fund spending (fiscal). When the Fed buys or sells bonds, it is changing the money supply (monetary). Always check who acts.

Data from the table: wage $20.00 → $20.60; price index 200.0 → 212.0.

Step by step:

1. Nominal wage change = ($20.60 − $20.00) ÷ $20.00 = +3%.
2. Inflation = (212.0 − 200.0) ÷ 200.0 = +6%.
3. Real wage factor = 1.03 ÷ 1.06 ≈ 0.972 → the real wage fell by about 3%.

Answer: it fell by about 3%, because prices rose faster than the wage.

Check: a basket that cost $200 in Year 1 costs $212 in Year 2. In Year 1 one hour of work bought 20.00 ÷ 200 = 10% of the basket; in Year 2 it buys 20.60 ÷ 212 ≈ 9.7% of the basket. Less than before. ✔

Tip: real change ≈ nominal change − inflation (3% − 6% ≈ −3%). A raise smaller than inflation is a pay cut in purchasing power.

Evidence:

• Paragraph 3: Brightwash "raised its price … and hired 400 new factory workers," while stores "raised the prices they charge shoppers."
• Paragraph 4: Kestland "responded with its own 25 percent tariff on apples grown in Aldera," and orders "fell by about one-third."

Step by step:

1. Winners in Aldera: Brightwash's owners and workers (and the government's tariff revenue).
2. Losers in Aldera: washing-machine shoppers (higher prices) and apple growers (lost sales after Kestland retaliated).
3. So the tariff helped one Aldera industry while hurting another.

Answer: the tariff helped some producers in Aldera, such as Brightwash, but hurt others, such as apple growers who lost sales to Kestland.

Why the others fail: shoppers paid more, so not everyone gained; Kestland's tariff reduced apple orders; and paragraph 3 says prices went up, not down.

Tip: trade questions often hinge on retaliation—when one country taxes imports, the other may tax that country's exports. Look for losers in industries that have nothing to do with the original tariff.

Data: Year 5 price index = 223.7; forecast inflation = 4%.

Step by step:

1. A 4% increase means multiplying by 1.04.
2. Year 6 index = 223.7 × 1.04 = 232.648, about 232.6.
3. Or in two steps: 4% of 223.7 = 8.948; 223.7 + 8.948 ≈ 232.6.

Answer: about 232.6.

Check: (232.6 − 223.7) ÷ 223.7 = 8.9 ÷ 223.7 ≈ 0.040 = 4%. ✔

Why the others tempt: 227.7 adds 4 points instead of 4 percent; 231.7 takes 4% of the Year 1 index (200 × 0.04 = 8) instead of Year 5; 214.8 decreases the index by 4%.

Tip: to work forward from an inflation rate, multiply by (1 + rate). A percent change is always a percent of the starting value.

Data: pay rose from $20.00 to $21.00. CPI rose from 271.0 (2021) to 292.7 (2022).

Step by step:

1. Percent raise in pay: ($21.00 − $20.00) ÷ $20.00 = 0.05 → 5%.
2. Inflation in 2022: \dfrac{292.7 - 271.0}{271.0} \times 100 \approx 8.0\%.
3. Prices rose faster (8%) than pay (5%), so the pay buys less than before.
4. Real pay in 2021 dollars: \$21.00 \times \dfrac{271.0}{292.7} \approx \$19.44. Compared with $20.00, that is a drop of about \dfrac{0.56}{20} \approx 2.8\%—about 3%.

Why the others are wrong: "rose 5%" ignores inflation (that is the nominal raise). "Rose about 13%" adds the raise and inflation. "Stayed the same" assumes the raise matched inflation.

Answer: Real pay fell by about 3%.

Tip: nominal = the dollar amount on the paycheck; real = what it can buy. If prices rise faster than pay, real pay falls—even when the paycheck grows.

Data:

Step by step:

1. Before: $450 − $400 → Brightwash cost stores $50 more.
2. After: the tariff adds 0.25 × $400 = $100, so imports cost $500. Brightwash rose to $480. $500 − $480 → Brightwash cost $20 less.

Answer: before the tariff Brightwash cost $50 more than an import; after, it cost $20 less.

Why the others tempt:

• "$50 less after" compares $500 with Brightwash's old $450 price, forgetting that Brightwash raised its price.
• "$55 more after" adds $25 instead of 25% to the import ($425).
• The last choice reverses which machine was cheaper.

Why it matters: the tariff turned Brightwash from the more expensive choice into the cheaper one. That shift is why Brightwash could raise its price and sell more—while shoppers paid more either way.

Tip: in tariff questions, apply the percent to the pre-tariff price, and watch for domestic producers changing their prices too.

Data: employed 30,400; unemployed 1,600; labor force 32,000; rate 5.0%.

Step by step:

1. Residents who stop looking for work are no longer counted as unemployed. They move to "not in the labor force." Economists call them discouraged workers.
2. New unemployed = 1,600 − 400 = 1,200.
3. New labor force = 30,400 + 1,200 = 31,600 (the labor force shrinks too).
4. New rate = 1,200 ÷ 31,600 × 100 ≈ 3.8%.

Answer: it falls to about 3.8%, even though no one found a job.

Why the others tempt: 5.0% assumes the 400 are still counted as unemployed; 6.3% wrongly adds them (2,000 ÷ 32,000); about 2.4% divides by all 50,000 residents.

Why it matters: a falling unemployment rate is not always good news. If it falls because people gave up, the economy has not added jobs. That is why economists also look at the number employed.

Tip: to count as unemployed, a person must be without a job and actively looking. Change either condition and both the top and bottom of the fraction can change.

Data from the table: nominal GDP $500 billion → $525 billion; price index 200.0 → 212.0.

Step by step:

1. Nominal GDP growth = (525 − 500) ÷ 500 = 5%. This is what the report measured.
2. Inflation = (212.0 − 200.0) ÷ 200.0 = 6%.
3. Real GDP factor ≈ 1.05 ÷ 1.06 ≈ 0.991 → real output fell about 1%.

Answer: the 5% is nominal growth; because prices rose about 6%, real output actually fell slightly.

Check: the dollar value of output rose only because prices rose. Output measured at constant prices was about $525 ÷ 1.06 ≈ $495 billion in Year 1 prices—a little less than the $500 billion of Year 1.

Why the others fail: real GDP did not rise 11% (that adds inflation instead of removing it) or 5% (nominal GDP is not adjusted for prices), and a 6% fall would ignore the 5% nominal rise.

Tip: "growth" on the GED should mean real growth. Real growth ≈ nominal growth − inflation.

Evidence:

• Briefing: prices up 7.2%, unemployment only 3.4% with more openings than job seekers, record borrowing, and GDP growth far above average. These are signs of an overheating economy.
• Excerpt: the full effect of a rate change "can take a year or more to appear."

Step by step:

1. The conditions still call for contractionary policy, which reduces spending.
2. Three months is much less than "a year or more," so it is too early to say the policy failed.
3. Cutting rates would make borrowing cheaper and encourage more spending—the opposite of what high inflation needs.

Answer: it is too soon to judge, because rate increases can take a year or more to affect spending, and the briefing's conditions still call for slowing spending.

Why the others fail:

• Cutting rates because unemployment is low gets the logic backward—low unemployment is a reason to keep cooling the economy.
• The excerpt says the Fed can act at regular meetings; nothing says only Congress can fight inflation.
• Neither source says inflation always ends on its own.

Tip: in two-source policy questions, use one source for the conditions and the other for how the tool works. Policy time lags are a common GED reason why a correct policy seems not to be working yet.