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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

In the standard description of the business cycle, which of the following best describes the typical behaviour of the economy during the trough phase?

At the trough output is at its lowest, unemployment is high and firms have plenty of spare capacity. It is the lower turning point of the cycle, after which the economy moves into recovery. High output and inflation describe the peak instead.

  1. AOutput is at its highest level and inflationary pressure is strongest
  2. BOutput is at its lowest point, unemployment is high and spare capacity is large, before recovery beginsCorrect
  3. COutput is growing at its fastest rate and firms are investing heavily
  4. DOutput is falling and firms are cutting investment but unemployment is still low
  5. Output is constant and prices are falling at the fastest rate

Explanation

The trough is the lower turning point of the cycle. Output is lowest, unemployment is high and there is unused capacity, after which recovery starts. The peak, not the trough, is where output is highest and inflationary pressure strongest.

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