Which type of unemployment grows during downturns and falls during expansions, linked to the business cycle and changes in aggregate demand?

• A. Structural unemployment
• B. Cyclical unemployment
• C. Frictional unemployment
• D. Seasonal unemployment

Answer: (B)

The main concept being tested is how unemployment changes with the business cycle through fluctuations in aggregate demand. Cyclical unemployment increases during downturns because weaker aggregate demand leads firms to cut production and lay off workers; it falls during expansions as demand strengthens and hiring picks up. This type moves with the cycle, unlike structural unemployment, which comes from mismatches between skills and jobs and persists regardless of the cycle; frictional unemployment, the short-term job search when changing jobs; and seasonal unemployment, which follows regular seasonal patterns. So cyclical unemployment specifically captures the fluctuations tied to the overall demand for goods and services in the economy.