General Financial Literacy State Practice Test

In an economic expansion, the economy is growing—output rises, businesses produce more, and overall spending by households and firms increases. This increase in demand leads to more production and typically to more hiring, which lowers unemployment. That combination—growth in output with higher spending—defines expansion, which is why the statement describing the economy growing and spending increasing is the best answer.

The other scenarios describe conditions that do not fit expansion: a contracting economy with rising unemployment signals a downturn, falling prices indicate deflation rather than growth, and while government deficits can occur for various reasons, they don’t by themselves define an expansion.