During the contraction phase of the business cycle, which statement about real GDP is true?

• A. Real GDP is increasing and unemployment is decreasing.
• B. Real GDP is rising above potential output as the economy overheats.
• C. Real GDP is falling, typically for at least two consecutive quarters.
• D. Real GDP remains constant while the price level falls sharply.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the business cycle phases. The contraction phase is a period when economic activity slows down after a peak, leading to a decrease in output and employment.
2. Step 2: Recall the definition of real GDP. Real GDP measures the value of all final goods and services produced within an economy, adjusted for inflation, reflecting the actual economic output.
3. Step 3: Analyze what happens to real GDP during contraction. Since economic activity is slowing, real GDP typically decreases during this phase.
4. Step 4: Recognize the typical duration of contraction. A common rule is that real GDP falls for at least two consecutive quarters to confirm a recession or contraction.
5. Step 5: Compare the given statements with the characteristics of contraction. The correct statement is that real GDP is falling, typically for at least two consecutive quarters, which aligns with the contraction phase.