A number macroeconomic variables decline during recessions. One of these variables is the GDP. a) What other variables, besides real GDP, tend to decline during recessions? Given the definition of real GDP and its components, explain the declines in these economic variables which are to be expected. b) Empirical studies indicate that the long-run trend in real GDP of the USA has an upward trend. How is this possible given business cycles and macroeconomic fluctuations? What factors explain the upward trend in spite of the cycles?

(a) Besides real GDP, consumption spending and investment spending decline during recessions.

(b) GDP grows in long run because of continuous increase in production because of population growth.

Explanation:

(a) During recessions, there is a general slow down in the economic activities. People stop spending on the things that are not necessary. There is a decline in consumption spending. Investment spending also falls. There is a fall in employment.

(b) In the long run though, the real GDP shows an upward trend as population is continuously increasing and so is the need for goods and services. To fulfill these needs, the production of goods and services is rising continuously. This contributes in the growth of GDP in the long run, despite business cycles and fluctuations.