CA Foundation · Business Economics · Business Cycles
Over a business cycle, an economy's real GDP index is 100 at the previous peak. It falls 10% to the trough, and then recovers by 10% of the trough level. What is the GDP index at the end of the recovery, and has the economy returned to the previous peak?
The index ends at 99 and the economy has not regained its previous peak. The 10% fall takes 100 to 90, and a 10% recovery is calculated on this lower base, adding only 9 points, so output remains one point short of the peak.
- A99; No, it remains below the previous peakCorrect
- B100; Yes, it has returned to the previous peak
- C101; Yes, it has crossed the previous peak
- D90; No, there was no recovery
Explanation
Trough = 100 × 0.90 = 90. A 10% recovery on the trough gives 90 × 1.10 = 99. The recovery is applied to a smaller base, so the index remains below 100. Option B wrongly applies 10% to the peak base and equates a fall of 10% with a rise of 10%.
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