1. Explain what you would expect to happen, and why, during a contraction in economic activity at levels of output, employment, and prices. Be sure to explain why you would expect these things to occur. An economic contraction is a phase in the business cycle in which economic activity decreases. An economic contraction occurs if real GDP declines for two or more consecutive quarters. (Investopedia, 2013). “Real GDP (real gross domestic product) is the value of final goods and services produced in a given year valued at constant prices.” (Parkin, 2005, p. G-7). During an economic contraction, the production of durable goods (furniture, automobiles, appliances, etc.) declines as consumers reduce spending on these goods. Furthermore, the production of durable goods decreases as inventories, housing and offices increase. The production of nondurable goods and services (e.g., food, clothing, doctor's visits, etc.) during an economic contraction remains relatively constant. The production of non-durable goods remains constant because even in an economic contraction consumers still need to purchase items such as food and clothing and therefore the demand for these items remains constant. (Harrington, 2013). Employment of individuals in the durable goods sector declines during an economic contraction. During an economic contraction, job shortages are caused by deficient aggregate demand, leading to cyclical unemployment. (Harrington, 2013). Aggregate demand is the total quantity of goods and services demanded in the economy at a given price and over a given period of time. (Investopedia, 2013). Skilled workers producing durable goods are mostly affected by cyclical unemployment as consumers reduce spending on durable goods... middle of paper... sources of supply. Retrieved from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=unemployment+sources Business Dictionary. (2013). Seasonal unemployment. Retrieved from http://www.businessdictionary.com/definition/seasonal-unemployment.html Harrington, C. (2013). Measuring macroeconomic inflation. Personal collection of C. Harrington, Nova Southeastern University, Fort Lauderdale, FL. Investopedia US. (2013). Aggregate demand. Retrieved from http://www.investopedia.com/terms/a/aggregatedemand.asp Investopedia USA. (2013). Definition of contraction. Retrieved from http://www.investopedia.com/terms/c/contraction.asp Investopedia US. (2013). Definition of structural unemployment. Retrieved from http://www.investopedia.com/terms/s/structuralunemployment.asp Parkin, M. (2005). Macroeconomics (7th ed.). Boston, San Francisco, New York: Addison-Wesley.