Phases of the Business Cycle

Question 1

Economic activity begins to decline, GDP decreases

Answer 1

Contraction

Question 2

Faced with unwanted inventories and declining profits, firms reduce production, postpone investment, curtail hiring, and may lay off employees

Answer 2

Contraction

Question 3

Business failures outnumber start-ups

Answer 3

Contraction

Question 4

Falling employment erodes household income and consumer confidence

Answer 4

Contraction

Question 5

Consumers react by spending less and saving more, which further cuts into sales

Answer 5

Contraction

Question 6

Stock market activity is low

Answer 6

Contraction

Question 7

Inflation, and therefore the rise in prices of goods and services, is stable.

Answer 7

Expansion

Question 8

Businesses adjust inventories and invest in new capacity to meet increased demand and avoid shortages

Answer 8

Expansion

Question 9

Corporate profits rise

Answer 9

Expansion

Question 10

New business start-ups outnumber bankruptcies

Answer 10

Expansion

Question 11

Stock market activity is strong and the markets typically rise

Answer 11

Expansion

Question 12

Job creation is steady and the unemployment rate is steady or falling

Answer 12

Expansion

Question 13

Demand begins to outstrip the capacity of the economy to supply it

Answer 13

Peak

Question 14

Labour and product shortages cause wage and price increases, and inflation rises accordingly

Answer 14

Peak

Question 15

Interest rates rise and bond prices fall, which dampens business investment and reduces sales of houses and other big-ticket consumer goods.

Answer 15

Peak

Question 16

Business sales decline, resulting in accumulation of unwanted inventory and reduced profits

Answer 16

Peak

Question 17

Stock prices generally begin to fall along with falling profits, and stock market activity declines

Answer 17

Peak

Question 18

Interest rates fall, triggering a bond rally

Answer 18

Trough

Question 19

Inflation falls

Answer 19

Trough

Question 20

Consumers who postponed purchases during the contraction are spurred by lower interest rates and begin to spend.

Answer 20

Trough

Question 21

Stock Prices Rally

Answer 21

Trough

Question 22

Firms that reduced inventories during the contraction must increase production to meet new demand.

Answer 22

Recovery

Question 23

Firms are typically still too cautious to hire back significant number of workers, but the period of widespread layoffs is over.

Answer 23

Recovery

Question 24

Firms are not yet ready to make significant new investment.

Answer 24

Recovery

Question 25

Unemployment remains high, wage pressures are restrained, and inflation may decline further.

Answer 25

Recovery