UNIT 12 CHECKPOINT EXAM

Question 1

GDP turned negative in the first quarter of the year, and was negative again in the second quarter. It is now August and numbers have not improved. The economy is experiencing

A) stagflation.
B) depression.
C) recession.
D) denial.

Answer 1

C) recession.

Explanation
The contraction has continued for at least six months; a recession. A depression occurs for a longer period than what is described here. Stagflation, though not good, does not mean a contraction. Denial is not a term associated with the economy’s state.

Question 2

Which of these places the phases of the business cycle in the correct order?

A) Trough, recovery, contraction, and prosperity
B) Contraction, trough, expansion, and peak
C) Peak, contraction, recovery, and prosperity
D) Expansion, contraction, trough, and recovery

Answer 2

B) Contraction, trough, expansion, and peak

Explanation
The order should be peak (or prosperity), contraction, trough, recovery or expansion. For the test, the business cycle may begin with any of these four phases. Officially, business cycles begin with a recovery, but this question asks you to put the phases in the correct order without regard for where in the cycle we start.

Question 3

The nation has passed through very trying economic times. Many have lost jobs and are tapping into savings to maintain their lifestyles. The economy is not weakening and shows a few signs of growth, but the damage from the downturn is very visible. The nation is likely entering a period of

A) trough.
B) deflation.
C) disaster.
D) recovery.

Answer 3

D) recovery.

Explanation
Recovery is the best answer. A recovery occurs when the economy begins to show some signs of growth after a period of contraction. The period of the trough (bottom) along with deflation and economic disaster are hopefully behind the nation.

Question 4

Producers would generally report rising inventories during which period of the business cycle?

A) Expansion
B) Peak
C) Contraction
D) Recovery

Answer 4

C) Contraction

Explanation
Downturns in the business cycle (a contraction) tend to be characterized by rising inventories (a sign of slackening consumer demand). During expansion (recovery is a synonym) and peak, goods are usually moving as fast as they can be produced with little chance of buildup in inventories.

Question 5

Inflation is most closely associated with which phase of the business cycle?

A) Prosperity
B) Recovery
C) Contraction
D) Expansion

Answer 5

D) Expansion

Explanation
Inflation is most associated with the expansion phase of the economy. During this phase, consumer demand has outstripped the economy’s ability to produce more goods. The result is too few goods and too many buyers.