CA Foundation · Business Economics · Business Cycles
Real GDP index values for an economy over five successive years are 100, 106, 112, 108, 104. Taking the highest value as the peak, by what percentage did output fall from the peak to the latest year, and what does this indicate, to one decimal place?
Output fell from the peak of 112 to 104, a decline of 8/112 × 100, about 7.1%. Since activity has dropped after reaching its highest point and is still falling, the economy is in the contraction phase of the cycle, not yet at a trough.
- AAbout 7.1% fall, indicating a contraction phase following a peakCorrect
- BAbout 3.7% fall, indicating a contraction phase following a peak
- CAbout 7.1% rise, indicating an expansion phase
- DAbout 4.0% fall, indicating the economy is at a trough
Explanation
Peak is 112 and the latest value is 104. Fall = (112 − 104)/112 × 100 = 8/112 × 100 = 7.1%. Output is below the peak and has been declining, so it is a contraction. The 3.7% figure uses the wrong base (108) for the final step, and 4.0% is just the last year-on-year change relative to 104 misread, with no trough established.
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