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Question 29
When an economy is in a recession,
(1) strong demand for investment funds will push interest rates upward.
(2) the unemployment rate will rise above its natural rate.
(3) the real interest rate will tend to rise.
(4) strong demand for resources will push the prices of resources upward.
(4)

Ask by Evans Mccarthy. in Cayman Islands
Mar 31,2025

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Tutor-Verified Answer

Answer

Only statement (2) is true: “the unemployment rate will rise above its natural rate.” The other statements are not accurate in the context of a recession.

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Extra Insights

Recessions can often feel like a storm cloud hanging over an economy, leading to an increase in unemployment rates as businesses downsize or close. Interestingly, during this phase, you often see a decrease in strong demand for investment funds, which can actually push interest rates downward instead of upward.
In practical terms, during a recession, consumers typically tighten their belts, leading to lower spending and investment, which can snowball into a broader economic slowdown. This means businesses might face challenges in funding growth or new projects, illustrating the complex interplay between confidence, spending, and investment in an economy.

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