CA Foundation · Business Economics · Business Cycles
A country's real GDP fell by 3% in Q1 and by 2% in Q2 of a year. The central bank observed rising unemployment and falling consumer confidence. According to standard business cycle terminology, which phase is the economy most likely in?
When real GDP declines for two consecutive quarters accompanied by rising unemployment and falling consumer confidence, the economy is in the contraction or recession phase of the business cycle, characterized by declining economic activity and deteriorating conditions.
- AEarly recovery phase with temporary setbacks
- BContraction or recession phaseCorrect
- CLate expansion phase before peak
- DTrough with immediate rebound expected
Explanation
Two consecutive quarters of negative GDP growth define a recession (contraction phase). Rising unemployment and falling consumer confidence reinforce this diagnosis. Option 1 (recovery) would show positive growth. Option 3 (late expansion) would show positive growth. Option 4 (trough) is premature without evidence the decline has stopped. The data clearly indicates contraction.
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