Economic Growth and the Business Cycle

What is Macroeconomics?

If microeconomics is a look at individual trees in a forest, then macroeconomics is a view of the entire forest as a whole. Macroeconomics studies the economy as a single unit, analyzing aggregate indicators that characterize the state of the entire national or global economy. Instead of asking “Why did the price of coffee increase?” (a microeconomic question), a macroeconomist asks “Why are prices in general rising?”—that is, they study inflation.

Macroeconomics studies a number of interconnected variables, each reflecting a key aspect of the economy’s condition:

• Economic growth — the rate of increase of total output of goods and services. Is the economy growing or shrinking? How fast? Is this growth sustainable?
• Unemployment — the proportion of the labor force that wishes to work but can't find a job. How many people are left without a means of subsistence? Which sectors suffer the most?
• Inflation — the general rise in the price level. How fast is money losing its value? Why do goods that cost 100 rubles yesterday cost 110 today?
• External economic relations — trade with other countries and exchange rates. Does a country export more than it imports? Is the national currency strengthening or weakening?
• Financial well-being — stability of the banking system and financial markets. Are banks able to lend? Is there a threat of a financial crisis?

All these variables are closely interconnected. When the economy grows too quickly, inflation often arises. When growth slows, unemployment rises. When a country imports a lot, it affects the exchange rate. Understanding these interrelationships is key to informed economic policy and making sound business decisions.

For business, the macroeconomic environment is the “weather” in which all firms operate. A company may be perfectly managed, but if the economy as a whole is in a deep recession, its sales will inevitably suffer. That is why managers and entrepreneurs need to understand macroeconomic trends and be able to forecast them.

Short-Term Economic Growth

Economic growth is the rate of change in the level of an economy's output from period to period. It is arguably the most important macroeconomic indicator because it determines the standard of living, business opportunities, and even the political stability of a country.

Generally, economic growth is measured over short periods—a quarter (3 months) or a year (12 months). For example, when the news says “Russia’s GDP grew by 3.6% in 2023,” it means that the total volume of goods and services produced increased by 3.6% compared to the previous year.

Gross Domestic Product (GDP)

GDP is the aggregate market value of all final goods and services produced within a country during a specific period (usually 12 months). The word “final” is critical here: we count only those goods that reach the end consumer, not intermediate goods (for example, we count the value of bread but not the flour from which it is baked—otherwise, there would be double counting).

To understand the scale: US GDP in 2023 was about $27 trillion—the world's largest economy. China's GDP—about $18 trillion (second place). Germany's GDP—about $4.5 trillion, making it the largest economy in Europe. Russia’s GDP—around $2.0 trillion at the nominal rate, but significantly higher in terms of purchasing power parity (PPP).

Nominal and Real GDP

The difference between nominal and real GDP is one of the most important in macroeconomics, and misunderstanding it leads to serious errors in economic analysis.

Nominal GDP—measured in current prices. It can increase for two reasons: (1) the economy is actually producing more goods and services, or (2) prices have simply increased. If a loaf of bread rises in price from 30 to 60 rubles, nominal GDP increases, even though the actual amount of bread produced remains the same.

Real GDP—measured in constant prices of a base year (for example, 2015). It removes the effect of inflation and shows the real change in output. It is real GDP that we are interested in if we want to know whether the economy is producing more.

Numerical Example: Let's imagine a simple economy that produces only two goods—bread and milk.

In 2022 (the base year): 1,000 loaves of bread at 50 rub. and 500 liters of milk at 80 rub.

• Nominal GDP 2022 = (1,000 × 50) + (500 × 80) = 50,000 + 40,000 = 90,000 rub.

In 2023: 1,100 loaves of bread at 55 rub. and 520 liters of milk at 90 rub.

• Nominal GDP 2023 = (1,100 × 55) + (520 × 90) = 60,500 + 46,800 = 107,300 rub.
• Nominal GDP growth = (107,300 − 90,000) / 90,000 × 100% = 19.2%

But part of this growth is just inflation! Let's calculate 2023 real GDP in 2022 prices:

• Real GDP 2023 = (1,100 × 50) + (520 × 80) = 55,000 + 41,600 = 96,600 rub.
• Real growth = (96,600 − 90,000) / 90,000 × 100% = 7.3%

The difference is huge: nominally, the economy grew by 19.2%, but really—by only 7.3%. The other 11.9 percentage points are simply price growth (inflation). For comparing changes in output over time, you must use real GDP.

Three Ways to Measure GDP

Amazingly, GDP can be measured in three completely different ways, and all three must give the same result. This is logical because every dollar spent is someone’s earned dollar, and every earned dollar is the result of someone’s production.

1. Product/Output Method

Summing the value added of all goods and services produced in the country, industry by industry. Value added is the value of output minus the value of intermediate goods. For example, if a bakery buys flour for 20 rub. and sells bread for 50 rub., its value added is 30 rub. We count exactly 30 rub., not 50, to avoid double counting (the flour has already been counted at the flour mill).

In a real economy, this method sums the value added of all sectors: agriculture, industry, construction, services, IT, and so on. For example, in the UK the services sector creates about 80% of GDP, industry about 14%, and agriculture less than 1%.

2. Income Method

Focus on incomes received from production. Every good or service produced generates income for someone: workers get wages, landowners—rent, shareholders—dividends, bankers—interest, entrepreneurs—profit. If you add up all these incomes, you get GDP. It is important to remember that factor incomes are only incomes from participation in production. For example, selling a used car is not a factor income; it is merely a redistribution of existing wealth.

3. Expenditure Method

Summing all expenditures on final products. This is the most intuitive method: everything produced is bought by someone.

GDP = C + I + G + X − M

Let’s look at each component:

• C (Consumption) — household consumer expenditures. This is the largest component of GDP in most countries. In the US, consumption accounts for about 68% of GDP, in the UK—about 63%. These are expenditures on food, clothing, housing, entertainment, transport—everything ordinary people purchase.
• I (Investment) — firms’ investment expenditures on capital goods (equipment, buildings, technology), as well as changes in inventories. In advanced countries, investment usually makes up 17–22% of GDP. In China, this figure reached 45% of GDP—an unprecedentedly high level reflecting a strategy of rapid industrialization.
• G (Government Spending) — government expenditures on goods and services (education, healthcare, defense, infrastructure). Usually 15–25% of GDP. Note: transfer payments (pensions, benefits) are not included because they are not expenditures on the production of goods and services.
• X (Exports) — exports, that is, expenditures by foreigners on domestic goods and services. For Germany, exports are about 47% of GDP—an economy highly oriented toward foreign trade. For the US—only about 11%.
• M (Imports) — imports are subtracted because they are already included in C, I, and G (when a consumer buys an imported TV, this is included in C, but it was not produced within the country).

Business Cycle (Business Cycle / Trade Cycle)

The economy never grows evenly and stably. Even the most successful economies in the world experience periods of rapid growth followed by slowdowns and downturns. These fluctuations are called the business cycle—periodic oscillations of national output around its long-term trend. Economies are subject to internal instability, and understanding the business cycle is critically important for business and government policy.

Key Concepts

Recession—a period of decline in real GDP for two or more consecutive quarters. This is the technical definition. For example, if GDP falls in January–March and falls again in April–June—the economy is officially in recession. However, some economists believe this definition is too narrow: the economy may be in a bad state even if there is no formal recession.

Actual growth—the annual percentage increase of national output.

Potential output—the level of output at “normal utilization” of capacity. This is the volume of products the economy could produce if all resources (labor, capital, land) were used at “normal” levels—not overstrained, but not left idle either.

Output gap—the difference between actual and potential output. A positive gap (actual > potential) means the economy is overheating: factories work in three shifts, workers are in short supply, wages rise, and this leads to inflation. A negative gap (actual < potential) means underutilized resources: there are unemployed people, idle capacity, and the economy could produce more.

Four Phases of the Business Cycle

1. Upturn (Recovery)—the beginning of recovery after a downturn. The economy has “bounced off the bottom.” Firms begin cautiously hiring workers, consumers slowly increase spending. Confidence gradually returns. Example: the economies of most developed countries in 2010–2011 after the Great Recession of 2008–2009.

2. Expansion (Boom)—rapid growth, falling unemployment, rising consumer and business confidence. Firms actively invest, banks willingly lend, new jobs are created. Example: the US economy in 2014–2019—a long period of stable growth when unemployment fell from 6.7% to 3.5% (a historic low).

3. Peaking Out—maximum output. The economy is working at the limit of its capabilities. Main signs: high inflation (resources are becoming more expensive due to increased demand), labor shortages, increasing imports (domestic producers cannot meet demand). Example: the Japanese economy in the late 1980s—the “bubble economy,” when real estate and stock prices reached unrealistic levels.

4. Slowdown / Recession—decrease in output, rising unemployment, falling confidence. Firms reduce production and lay off workers. Consumers cut back on spending. Investment drops. Example: the global recession of 2008–2009, when the GDP of most developed countries fell by 3–5%.

Historical Examples of Business Cycles

The Great Depression (1929–1933)—the deepest economic crisis of the 20th century. US GDP fell by 30%, unemployment reached 25%, thousands of banks failed. The crisis began with the stock market crash in October 1929 and spread worldwide. This experience caused economists (especially John Maynard Keynes) to reconsider the role of the state in the economy and led to the creation of modern macroeconomic policy.

Postwar Boom (1945–1973)—the “golden age” of capitalism. Western economies grew at unprecedented rates: German GDP grew by 8% per year (“economic miracle”), Japanese GDP even faster. Reasons: postwar reconstruction, the Marshall Plan, technological progress, growth of international trade, stable financial system (Bretton Woods system).

Oil Crises (1973, 1979)—a sharp rise in oil prices led to stagflation (a combination of inflation and economic stagnation) in advanced economies. This was a supply shock that traditional Keynesian policy could not cope with.

Global Financial Crisis (2007–2009)—the crisis began in the US subprime mortgage market and quickly spread throughout the world. The largest banks were on the verge of bankruptcy (Lehman Brothers went bankrupt in September 2008), credit markets froze, international trade plummeted. World GDP shrank by 2.1% in 2009—the first time this happened since World War II. Unemployment in the eurozone reached 12%, in Spain—26%, and among Spanish youth—55%.

COVID Recession (2020)—the COVID-19 pandemic led to an unprecedented shock: governments around the world introduced quarantine restrictions, shutting down much of the economy. UK GDP fell by 9.7% in 2020—the deepest drop in 300 years. US GDP fell by 3.4%, the eurozone—by 6.4%. However, the recovery was unusually rapid: already in 2021, most economies returned to pre-pandemic levels, largely due to unprecedented government support measures.

Features of the Business Cycle in Practice

It is important to understand that business cycles are irregular—they vary in length and amplitude. There is no clear “schedule” of crises. An expansion can last from a few years (like from 2001–2007) to an entire decade (such as 2010–2020 in the US). Recessions can be short and shallow (like the 2001 US recession) or deep and prolonged (like the Great Depression).

Most macroeconomic analysis focuses on fluctuations of aggregate demand (AD). Periods of rapid growth are usually associated with a rapid expansion of AD: consumers spend more, firms invest more, and the government increases spending. Recessions are usually associated with a fall in AD: consumers cut spending for fear of losing jobs, firms delay investment due to uncertainty.

However, sometimes cycles are caused by changes in aggregate supply (AS): technological breakthroughs can accelerate growth, and shocks (sharp rises in oil prices, pandemics, wars) can cause downturns.

<div style="text-align: center; margin: 20px 0;"> <svg width="100%" style="max-width: 600px;" viewBox="0 0 540 400" xmlns="http://www.w3.org/2000/svg"> <defs> <marker id="m6-arr1" markerWidth="8" markerHeight="6" refX="8" refY="3" orient="auto"> <polygon points="0 0, 8 3, 0 6" fill="#333" /> </marker> </defs> <line x1="60" y1="20" x2="60" y2="360" stroke="#333" stroke-width="1.5" marker-end="url(#m6-arr1)" /> <line x1="60" y1="340" x2="510" y2="340" stroke="#333" stroke-width="1.5" marker-end="url(#m6-arr1)" /> <text x="25" y="190" font-family="sans-serif" font-size="12" fill="#333" transform="rotate(-90, 25, 190)" text-anchor="middle">Real GDP</text> <text x="290" y="375" font-family="sans-serif" font-size="12" fill="#333" text-anchor="middle">Time</text> <line x1="80" y1="300" x2="490" y2="100" stroke="#2563eb" stroke-width="1.5" stroke-dasharray="8,4" /> <text x="485" y="88" font-family="sans-serif" font-size="10" fill="#2563eb" font-weight="bold">Long-term trend</text> <path d="M 80,300 C 110,290 130,260 160,240 C 190,220 200,200 220,195 C 240,190 250,210 270,220 C 290,230 300,240 310,235 C 320,230 330,200 350,180 C 370,160 380,145 400,140 C 420,135 430,155 440,165 C 450,175 460,180 470,175 C 480,170 485,150 490,140" stroke="#dc2626" stroke-width="2.5" fill="none" /> <circle cx="220" cy="195" r="4" fill="#dc2626" /> <text x="220" y="183" font-family="sans-serif" font-size="11" fill="#dc2626" text-anchor="middle" font-weight="bold">Peak</text> <circle cx="310" cy="235" r="4" fill="#dc2626" /> <text x="310" y="258" font-family="sans-serif" font-size="11" fill="#dc2626" text-anchor="middle" font-weight="bold">Trough</text> <circle cx="400" cy="140" r="4" fill="#dc2626" /> <text x="400" y="128" font-family="sans-serif" font-size="11" fill="#dc2626" text-anchor="middle" font-weight="bold">Peak</text> <circle cx="470" cy="175" r="4" fill="#dc2626" /> <text x="470" y="198" font-family="sans-serif" font-size="11" fill="#dc2626" text-anchor="middle" font-weight="bold">Trough</text> <path d="M 230,197 L 260,210" stroke="#16a34a" stroke-width="0.8" /> <text x="265" y="210" font-family="sans-serif" font-size="10" fill="#16a34a" font-weight="bold">Decline/Recession</text> <path d="M 320,232 L 345,195" stroke="#9333ea" stroke-width="0.8" /> <text x="340" y="190" font-family="sans-serif" font-size="10" fill="#9333ea" font-weight="bold">Recovery</text> <path d="M 145,270 L 175,250" stroke="#9333ea" stroke-width="0.8" /> <text x="120" y="280" font-family="sans-serif" font-size="10" fill="#9333ea" font-weight="bold">Recovery</text> <text x="270" y="393" font-family="sans-serif" font-size="12" fill="#555" font-style="italic" text-anchor="middle">Fig. 1: Business Cycle</text> </svg> </div>

Long-Term Economic Growth

Although in the short term the economy fluctuates around the trend, in the long term most economies exhibit positive growth. Average global per capita GDP has increased about tenfold over the last 200 years. For sustainable long-term growth, it is necessary to increase the productive capacity of the economy—through investment in capital (equipment, infrastructure), human capital (education, healthcare), technology, and innovation.

Differences in long-term growth rates between countries are colossal. South Korea in 1960 was one of the poorest countries in the world (per capita GDP lower than that of many African nations). Thanks to massive investment in education, technology, and export-oriented industry, by the 2020s it became one of the world’s 10 largest economies. This shows how important the right economic policy is for long-term growth.

Aggregate Demand (AD) and Aggregate Supply (AS)

The AD-AS model is the main analytical tool of macroeconomics, allowing us to understand how the price level and total output are determined in the whole economy. If the supply and demand (S–D) model in microeconomics explains price and quantity in an individual market, then the AD–AS model does the same for the whole economy.

Aggregate Demand

Aggregate demand is the total planned expenditure on goods and services in the economy at each price level. The formula for AD is already familiar:

AD = C + I + G + X − M

The AD curve slopes downward—as the general price level increases, aggregate expenditures (and hence real GDP) fall. But why? In macroeconomics, we cannot use the same arguments as in microeconomics (income and substitution effects for a single good). Here are three macroeconomic reasons:

International substitution effect. When domestic prices rise, domestic goods become more expensive relative to imported goods. Consumers and firms switch to imports, and foreign buyers cut purchases of now more expensive exports. As a result, net exports (X − M) fall, and AD decreases. For example, if inflation in the UK is higher than in the eurozone, British goods become less competitive and Britons buy more European goods.

Intertemporal substitution effect. When prices rise, consumers may postpone purchases, expecting prices to stabilize or fall in the future. This especially applies to large purchases: if car or housing prices rise, people often decide to “wait.”

Real balance (wealth) effect. Price growth reduces the real value of money savings. If a person has 1,000,000 rubles in an account and prices rise by 20%, their real wealth decreases—they can now buy 20% less goods. This makes people feel poorer and cut spending.

Shifts in AD occur when any component of AD (C, I, G, X, or M) changes for reasons other than a change in the price level. For example:

• Increase in consumer confidence → C rises → AD shifts right
• Lower interest rates → I rises → AD shifts right
• Increase in government spending → G rises → AD shifts right
• Export growth due to currency depreciation → X rises → AD shifts right
• Higher taxes → disposable income falls → C falls → AD shifts left

Movement along AD is caused by a change in the overall price level—this is not a shift of the curve, but movement along it.

Aggregate Supply

Aggregate supply is the total amount of goods and services that firms plan to produce at each price level.

The AS curve slopes upward (at least in the short run). Why?

The key assumption: resource prices (wages, rent, the cost of raw materials) are fixed in the short run—they don’t have time to react to changes in the price level. When prices for finished goods rise but wages and input costs remain the same, profits for firms increase and it becomes profitable to produce more. In addition, diminishing returns mean that as output expands, each additional unit costs more (you have to hire less-skilled workers, use less efficient equipment), and firms are only willing to do this at higher prices.

Shifts in AS occur when production costs change: higher prices for raw materials (oil, gas), rising wages, technological change, new regulations. For example, the sharp rise in oil prices in 1973 caused AS to shift left in all oil-importing countries—production costs increased, so firms were willing to produce less at each price level.

AD-AS Equilibrium

Macroeconomic equilibrium is achieved at the point where the AD and AS curves intersect. This point determines the equilibrium price level (Pe) and equilibrium real GDP (Ye).

If the price level is below equilibrium, aggregate demand exceeds aggregate supply—there is excess demand, and prices will begin to rise until they reach equilibrium. If the price level is above equilibrium, supply exceeds demand, and prices fall.

The AD–AS model allows us to analyze the effects of various economic events. For example, an increase in government spending shifts AD right → in the new equilibrium both prices and real GDP are higher. An increase in oil prices shifts AS left → prices go up, real GDP goes down (stagflation). A technological breakthrough shifts AS right → prices fall, real GDP grows—an ideal scenario.

Three Methods of Measuring GDP

GDP can be measured by three equivalent methods. Theoretically, all three should give the same result, since they measure the same economic activity from different angles. In practice, statistical discrepancies arise, but the principle of equivalence is fundamental.

1. Output / Production Method

Sums the value added created by each sector of the economy. Value added = value of sector output - value of intermediate goods (inputs) used in production.

Example: The bakery buys flour for £200 and sells bread for £500. The bakery’s value added = £500 - £200 = £300. The mill buys wheat for £50 and sells flour for £200. The mill’s value added = £200 - £50 = £150. The farmer grows wheat without purchased inputs and sells it for £50. The farmer’s value added = £50.

Total GDP = £50 + £150 + £300 = £500—which equals the value of the final product (bread). That is why we count either only value added or only final goods—to avoid double counting.

Why use this method? It shows the structure of the economy: which sectors make the largest contributions to GDP. For example, in the UK, the services sector accounts for about 80% of GDP, industry about 15%, agriculture less than 1%.

2. Income Method

Sums all incomes earned by factors of production for creating GDP:

• Wages and salaries (compensation of employees) — return to factor “labor”
• Profit (gross operating surplus) — return to factor “capital,” including corporate profit, self-employment income, interest payments
• Rent — return to factor “land”

Logic: every ruble spent on buying a good (expenditure method) ultimately becomes someone’s income—a worker’s wage, an entrepreneur’s profit, building rent to the landlord. Therefore, sum of all incomes = sum of all expenditures = total value of output.

Important: In calculation, one must add indirect taxes (VAT, excise), and subtract subsidies, because market prices of goods include these taxes, but factor incomes do not.

3. Expenditure Method

Sums all expenditures on purchasing final goods and services. This is the most intuitive method, and it forms the basis of the AD formula:

GDP = C + I + G + (X - M)

where:

• C (Consumption)—household consumption spending (usually 60–70% of GDP in advanced economies)
• I (Investment)—gross domestic investment (firms’ expenditures on equipment, construction, changes in inventories) (usually 15–25% of GDP)
• G (Government spending)—government purchases of goods and services (usually 15–25% of GDP)
• X - M (Net Exports)—exports minus imports (can be positive or negative)

Numerical example for a hypothetical economy:

GDP = 1,300 + 340 + 400 + (560 - 600) = 1,300 + 340 + 400 - 40 = £2,000 bln

Why Do All Three Methods Give the Same Result?

It follows from the fundamental identity of the economic circular flow. When a consumer buys a loaf of bread for £5 (expenditure), this £5 becomes the bakery’s revenue (output), which is distributed as the baker’s wage, owner’s profit, rent for premises (incomes). Each transaction is simultaneously the buyer’s expenditure, the producer’s output, and someone’s income.

Limitations of GDP as a Measure of Well-Being

GDP is a useful but imperfect indicator of economic welfare:

• Does not account for unpaid work: Housework, volunteering, childrearing are not included in GDP, though they create tremendous value. Estimates suggest unpaid household work may comprise 10–40% of GDP.
• Does not account for the shadow economy: Illegal activities and informal employment are not reflected in official data. In some developing countries, the shadow economy reaches 40–60% of GDP.
• Does not reflect distribution: GDP may rise, but if all the increase goes to the top 1%, the majority’s standard of living doesn't improve.
• Does not account for environmental damage: Deforestation increases GDP (sale of timber) but decreases ecological well-being.
• Does not reflect quality of life: Leisure, health, safety, freedom—these crucial welfare factors are not measured by GDP.

That’s why economists use other indicators as well: per capita GDP at PPP, Human Development Index (HDI), Gini coefficient (inequality), and others.

Practical Exercises

Problem 1: Calculating GDP by Expenditure Method

Question: A country’s economy has the following data for 2024:

• Consumer spending (C) = £800 bln
• Investment (I) = £200 bln
• Government spending (G) = £250 bln
• Exports (X) = £300 bln
• Imports (M) = £350 bln

(a) Calculate GDP. (b) Calculate net exports. Is the country a net exporter or net importer? (c) Which component comprises the largest share of GDP?

Solution: (a) GDP = C + I + G + (X - M) = 800 + 200 + 250 + (300 - 350) = 800 + 200 + 250 - 50 = £1,200 bln

(b) Net exports = X - M = 300 - 350 = -£50 bln. The country is a net importer—it buys more from other countries than it sells to them.

(c) Consumer spending C = £800 bln, which makes 800/1200 = 66.7% of GDP—the largest share. This is typical: in most advanced countries, household consumption is the largest component of GDP.

Problem 2: Real vs. Nominal GDP

Question: A country’s nominal GDP rose from £500 bln in 2022 to £550 bln in 2023. The price level rose by 8%. (a) Did real GDP grow? (b) Calculate approximate real GDP for 2023 in 2022 prices. (c) What is the real economic growth rate?

Solution: (a) Nominal growth = (550 - 500) / 500 = 10%. Inflation = 8%. Real growth ≈ 10% - 8% = 2%. Yes, real GDP grew, but much less than the nominal figure suggests.

(b) Real GDP 2023 = Nominal GDP 2023 / (1 + inflation) = 550 / 1.08 ≈ £509.3 bln (in 2022 prices).

(c) Real growth rate = (509.3 - 500) / 500 × 100% ≈ 1.9%. This is much less impressive than the nominal 10% growth. Without adjusting for inflation, economic growth is greatly overstated—that is why real GDP is much more informative than nominal GDP.

Problem 3: AD–AS Analysis

Question: For each of the following events, determine: (1) which curve shifts (AD or AS), (2) in which direction, (3) what happens to equilibrium GDP and price level.

A. The government significantly increases infrastructure spending B. A sharp rise in global oil prices C. The central bank raises the interest rate D. A major technological breakthrough reduces production costs

Solution: A. AD shifts right. G (government spending) is a component of AD. Higher G increases aggregate demand. Result: GDP increases, price level increases (demand-pull inflation). The effect size depends on the multiplier and the slope of AS.

B. AS shifts left. Oil is a key resource, a rise in its price raises production costs for almost all goods. Result: GDP decreases, price level increases. This is stagflation—simultaneous recession and inflation, the worst combination for the economy. This happened in 1973–74 and 1979–80.

C. AD shifts left. Higher interest rates make loans more expensive → investment (I) decreases, credit-based consumption (part of C) drops → aggregate demand falls. Result: GDP decreases, price level falls (or growth slows). Central banks raise rates purposely to fight inflation, consciously sacrificing economic growth.

D. AS shifts right. A technological breakthrough lowers costs → firms are ready to produce more at every price level. Result: GDP increases, price level decreases. This is the ideal scenario—economic growth without inflation. Examples: the IT revolution of the 1990s in the US, introduction of container shipping in the 1960s.