Chapter 10: Problem 17

The Business Cycle Dating Committee of the National Bureau of Economic Research would most likely classify which one of the following as a recession? (LO3) a) A one-tenth of 1 percent decline in real GDP for two consecutive quarters b) An increase in the unemployment rate for two consecutive months c) A decline in nonfarm payrolls, industrial production, and personal income over six months d) A 1 percent rate of deflation over at least three months accompanied by rising interest rates

Short Answer

Expert verified

The correct option is (c) A decline in nonfarm payrolls, industrial production, and personal income over six months.

Step by step solution

Understanding the concept of recession

A recession is typically defined as a period of significant decline in economic activity over a certain period, usually several months to a few years. Some common indicators of a recession include decrease in real GDP (Gross Domestic Product), rising unemployment, decline in industrial production, and falling personal income.

Evaluating option (a)

Option (a) states: "A one-tenth of 1 percent decline in real GDP for two consecutive quarters." A decline in real GDP for consecutive quarters indicates a negative economic growth. This is a possible indicator of a recession, so we shall keep this option in mind.

Evaluating option (b)

Option (b) states: "An increase in the unemployment rate for two consecutive months." While rising unemployment can be an indicator of a recession, two months might not be a sufficient period to classify it as a recession. This option is relatively weaker than option (a), but we can still keep it in mind.

Evaluating option (c)

Option (c) states: "A decline in nonfarm payrolls, industrial production, and personal income over six months." A decline in these three indicators over six months represents a significant decline in economic activity, which is a strong sign of a recession. Out of the given options, this has the most indicators of a recession and is supported by a significant decline over a longer period.

Evaluating option (d)

Option (d) states: "A 1 percent rate of deflation over at least three months accompanied by rising interest rates." Deflation and rising interest rates can be indicators of a recession, but these factors alone may not be enough to classify the situation as a recession. This option is weaker in comparison to option (c). Since option (c) has the most indicators of a recession and is supported by a decline over a longer period (six months), it is the most likely option that the Business Cycle Dating Committee of the National Bureau of Economic Research would classify as a recession.

Answer

The correct option is (c) A decline in nonfarm payrolls, industrial production, and personal income over six months.

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