Which macroeconomic concept explains the decline in GDP during a financial crisis?

• A. Inflation
• B. Recession
• C. Growth
• D. Stagflation

Answer: (B)

A recession is the macro concept that explains a decline in GDP during a financial crisis. GDP shows the total value of goods and services produced in the economy, and during a crisis, demand for goods and services falls, credit tightens, and unemployment rises. With fewer people buying and firms investing less, overall economic output contracts, so GDP drops for a period of time. While the exact dating can vary by country, this downturn in production and activity across many sectors is the hallmark of a recession.

Inflation wouldn’t describe a shrinking economy, since it’s about rising price levels. Growth refers to an expansion in economic activity, which is the opposite of what’s happening. Stagflation combines slow growth with high inflation, which is a more specific and less typical pairing for a straightforward decline in GDP during a crisis.