Cyclical unemployment and recession often arise from changes in which component of the economy?

• A. Government spending
• B. Aggregate supply
• C. Aggregate demand
• D. Labor productivity

Answer: (C)

Verified step by step guidance

1. Understand the key terms: Cyclical unemployment refers to unemployment that rises during economic downturns (recessions) and falls during expansions. A recession is a period of declining economic activity.
2. Recall that aggregate demand (AD) represents the total demand for goods and services in an economy at a given overall price level and in a given time period.
3. Recognize that changes in aggregate demand directly affect output and employment levels. When aggregate demand decreases, firms produce less and may lay off workers, increasing cyclical unemployment.
4. Contrast this with aggregate supply, which relates to the total output firms are willing to produce at different price levels. Changes in aggregate supply affect prices and output but are not the primary cause of cyclical unemployment.
5. Conclude that cyclical unemployment and recessions are primarily caused by shifts in aggregate demand, as reductions in demand lead to lower production and higher unemployment.