Use the graph below, which represents the business cycle for some economy from 1990-2000, to answer the following question. Suppose points I and III represent business cycle peaks at January 1990 and January 1998 respectively. Suppose that point II represents a business cycle trough at January 1993. Given this information, when was this economy in expansion?

Question

BlackTom AI · Accepted Answer

To analyze when the economy was in expansion, we first identify the key turning points on the graph: I is a business cycle peak at January 1990, II is a trough at January 1993, and III is another peak at January 1998.

Option 1: 1998 to 2000. This period starts right after the peak in January 1998 and continues as the economy moves downward toward 2000. Since expansion is defined as a period of rising output, this interval does not represent expansion; it follows a peak when GDP is decreasing, not increasing.

Option 2: 1993 to 1998. The trough at January 1993 marks the end of a contraction and the start of an expansion phase. From this trough, GDP rises steadily until it reaches the next peak in January 1998. This sequence—contraction up to a trough followed by expansion up to the next peak—is the classic expansion period in a business cycle.

Option 3: 1990 to 1993. This interval covers the period from the peak at January 1990 down to the trough at January 1993. That stretch corresponds to a contraction (recession) as GDP declines from 100 toward 50, not an expansion.

Option 4: Economy started and ended in the same GDP level, 100, so there was never an expansion period. The graph shows clear movement away from 100 after 1990 and again approaching or passing 100 later, but the specific sequence provided (a trough at 50 in 1993 and a rise to a 130 peak in 1998) indicates substantial changes in GDP. Therefore this statement oversimplifies and mischaracterizes the cycle.

In summary, the only interval that matches a rise in GDP from the trough in 1993 to the next peak in 1998 is 1993 to 1998, which aligns with the definition of an expansion phase in the business cycle.

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