GDP The Business Cycle 2 — Questions and Answers
Question 1: Which phase of the business cycle is characterized by rising unemployment, falling consumer spending, and declining GDP?
- Expansion
- Peak
- Contraction (Correct answer)
- Trough
Correct answer: Contraction
Contraction (also called recession) features rising unemployment, reduced consumer spending, and negative or slowing GDP growth.
Question 2: The National Bureau of Economic Research (NBER) officially determines US recession dates based primarily on which criterion?
- Two consecutive quarters of negative GDP growth
- A broad decline in economic activity lasting more than a few months (Correct answer)
- Unemployment rising above 6%
- Stock market declining more than 20%
Correct answer: A broad decline in economic activity lasting more than a few months
NBER defines a recession as a significant decline in economic activity spread across the economy lasting more than a few months, not just two negative GDP quarters.
Question 3: Which leading economic indicator is most commonly used to predict upcoming business cycle turning points?
- Average duration of unemployment
- New orders for consumer goods (Correct answer)
- Commercial and industrial loans outstanding
- Prime interest rate
Correct answer: New orders for consumer goods
New orders for consumer goods are a leading indicator because manufacturers respond to orders before production changes, signaling future economic direction.
Question 4: During which business cycle phase would a firm most likely increase capital expenditures and hire new workers?
- Trough
- Contraction
- Expansion (Correct answer)
- Peak
Correct answer: Expansion
During expansion, rising demand and business confidence encourage firms to invest in capital and add workers to meet growing output needs.
Question 5: What is a 'jobless recovery' in the context of the business cycle?
- A recession with no rise in unemployment
- GDP growth resuming after a trough while unemployment remains high (Correct answer)
- Full employment reached before GDP returns to trend
- A recovery caused entirely by government spending
Correct answer: GDP growth resuming after a trough while unemployment remains high
A jobless recovery occurs when GDP begins growing again after a recession but unemployment stays elevated as firms remain cautious about hiring.
Question 6: Which sector of the US economy tends to be MOST cyclically sensitive and typically contracts sharply during recessions?
- Healthcare
- Utilities
- Durable goods manufacturing (Correct answer)
- Food and beverage
Correct answer: Durable goods manufacturing
Durable goods manufacturing is highly cyclical because consumers and businesses postpone purchases of long-lived items like cars and machinery during downturns.
Question 7: In the business cycle, what term describes the low point between a contraction and the beginning of an expansion?
- Boom
- Trough (Correct answer)
- Peak
- Stagflation
Correct answer: Trough
The trough is the lowest point of the business cycle, marking the end of contraction and the start of recovery/expansion.
GDP The Business Cycle 2
Which phase of the business cycle is characterized by rising unemployment, falling consumer spending, and declining GDP?