NASAA Series 66 Uniform Combined State Law ExaminationEconomic Factors and Business InformationMedium
An investment adviser is explaining the concept of economic cycles to a new client. The adviser describes a period characterized by a significant decline in economic activity across sectors, marked by falling GDP, rising unemployment, and decreasing consumer spending. This phase of the economic cycle is known as a:
- ATrough.
- BExpansion.
- CPeak.
- DContraction.
Show answer & explanationAnswer & explanation
Correct answer: D. Contraction.
A contraction (or recession) is a phase of the business cycle in which the economy as a whole is in decline. It is characterized by widespread decreases in economic activity, including falling GDP, rising unemployment, and reduced consumer spending.
Why the other options are wrong
- A. A trough is the lowest point of economic activity before recovery begins, not the period of decline.
- B. Expansion is a period of economic growth, contrary to the description.
- C. A peak is the highest point of economic activity before a downturn, not the downturn itself.
Economic Contraction (Recession)
A phase of the business cycle characterized by a general slowdown in economic activity, typically marked by falling GDP and rising unemployment.
- Follows a peak.
- Precedes a trough.
- Often defined as two consecutive quarters of negative GDP growth.
Memory trick: Peak then Plunge, Contraction's Run.