CFA Level I · CFA Level I Exam · Understanding Business Cycles
Which feature most accurately distinguishes the contraction phase of the business cycle from the expansion phase?
A contraction is distinguished by falling aggregate output and employment, with declining spending and investment, running from peak to trough. Interest rates and inflation do not move uniformly in every contraction, so statements claiming they always do are inaccurate.
- AInterest rates always fall
- BFalling aggregate output and employment, with spending and investment decliningCorrect
- CInflation always exceeds the central bank target
Explanation
A contraction runs from the peak to the trough and is marked by declining output, employment, investment and spending. Interest rates and inflation do not behave in a fixed way in every contraction, so the other options use words that are too absolute.
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