READING 13 UNDERSTANDING BUSINESS CYCLES

Question 1

Which of the following best describes the peak phase of the business cycle?
A. Real GDP is increasing at an accelerating rate.
B. Real GDP has stopped increasing and begins to decrease.
C. Real GDP is at its lowest point before starting to increase.

Answer 1

Correct Answer: B

Explanation:
B is correct: The peak phase is characterized by the economy reaching its maximum output, after which economic activity begins to decline.
A is incorrect: This describes the expansion phase, where real GDP is increasing, possibly at an accelerating rate.
C is incorrect: This describes the trough phase, where real GDP is at its lowest point before starting to increase.

Question 2

Which of the following indicators is most likely to be classified as a leading economic indicator?
A. Unemployment rate
B. Stock market returns
C. Industrial production

Answer 2

Correct Answer: B

Explanation:
B is correct: Stock market returns often change before the economy as a whole does, making them a leading indicator.
A is incorrect: The unemployment rate is a lagging indicator, as it changes after the economy has begun to follow a particular trend.
C is incorrect: Industrial production is a coincident indicator, moving in line with the overall economy

Question 3

During which phase of the business cycle is inflation most likely to accelerate?
A. Expansion
B. Contraction
C. Trough

Answer 3

Correct Answer: A

Explanation:
A is correct: During the expansion phase, increased demand for goods and services can lead to higher prices, causing inflation to accelerate.
B is incorrect: In the contraction phase, demand typically decreases, which can reduce inflationary pressures.
C is incorrect: The trough phase is the lowest point of the cycle, and inflation is usually moderate or low during this period.

Question 4

Which of the following best describes a coincident economic indicator?
A. An indicator that changes direction after the economy does.
B. An indicator that changes direction before the economy does.
C. An indicator that changes direction at the same time as the economy.

Answer 4

Correct Answer: C

Explanation:
C is correct: Coincident indicators move in line with the overall economy, reflecting the current state of economic activity.
A is incorrect: This describes a lagging indicator.
Scribd
B is incorrect: This describes a leading indicator.

Question 5

Which of the following is most likely to occur during the contraction phase of the business cycle?
A. Increasing consumer confidence
B. Rising unemployment rates
C. Accelerating investment in capital goods

Answer 5

Correct Answer: B

Explanation:
B is correct: During a contraction, economic activity slows down, leading to higher unemployment rates.
A is incorrect: Consumer confidence typically declines during a contraction.
C is incorrect: Investment in capital goods usually decreases as businesses anticipate lower demand.

Question 6

Which of the following best describes the trough phase of the business cycle?
A. The point where real GDP stops decreasing and begins increasing.
B. The point where real GDP reaches its highest level.
C. The phase where inflation is at its peak.

Answer 6

Correct Answer: A

Explanation:
A is correct: The trough is the lowest point in the business cycle, marking the end of a contraction and the beginning of an expansion.
B is incorrect: This describes the peak phase.
C is incorrect: Inflation typically peaks during the expansion phase, not the trough.

Question 7

Which of the following is a characteristic of the expansion phase of the business cycle?
A. Decreasing consumer spending
B. Increasing employment
C. Declining industrial production

Answer 7

Correct Answer: B

Explanation:
B is correct: During expansion, businesses grow, leading to higher employment levels.
A is incorrect: Consumer spending typically increases during expansion.
C is incorrect: Industrial production usually rises as demand increases.

Question 8

Which of the following indicators is most likely to be classified as a lagging economic indicator?
A. Average weekly hours in manufacturing
B. Inventory-to-sales ratio
C. New orders for consumer goods

Answer 8

Correct Answer: B

Explanation:
B is correct: The inventory-to-sales ratio typically changes after the economy has begun to follow a particular trend, making it a lagging indicator.
A is incorrect: Average weekly hours in manufacturing is a leading indicator.
C is incorrect: New orders for consumer goods are also considered leading indicators.

Question 9

Which of the following best describes the behavior of imports during an economic expansion?
A. Imports decrease due to higher domestic production.
B. Imports remain unchanged.
C. Imports increase as consumer demand rises.

Answer 9

Correct Answer: C

Explanation:
C is correct: During expansion, increased consumer demand often leads to higher imports.
A is incorrect: While domestic production increases, it may not fully meet rising demand, leading to more imports.
B is incorrect: Imports typically change in response to economic conditions; they don’t remain static.

Question 10

Which of the following is most likely to occur as an economy approaches the peak phase of the business cycle?
A. Accelerating sales growth
B. Decreasing inventory levels
C. Increasing inventory-to-sales ratio

Answer 10

Correct Answer: C

Explanation:
C is correct: As sales growth slows near the peak, inventories may accumulate, increasing the inventory-to-sales ratio.
A is incorrect: Sales growth typically decelerates as the economy approaches its peak.

B is incorrect: Inventory levels may increase, not decrease, due to slower sales.

Question 11

Which of the following best describes the behavior of inflation during the contraction phase of the business cycle?
A. Inflation accelerates due to increased demand.
B. Inflation remains unchanged.
C. Inflation typically decreases as demand falls.

Answer 11

Correct Answer: C

Explanation:
C is correct: During contraction, decreased demand can lead to lower inflation or even deflation.
A is incorrect: Inflation usually does not accelerate during a contraction.
B is incorrect: Inflation rates often change in response to economic conditions.

Question 12

Which of the following is a characteristic of the recovery phase following a trough in the business cycle?
A. Continued decline in employment
B. Negative GDP growth
C. Moderate inflation with increasing economic activity

Answer 12

Correct Answer: C

Explanation:
C is correct: In the recovery phase, economic activity picks up, and inflation remains moderate.
A is incorrect: Employment typically begins to increase during recovery.
B is incorrect: GDP growth turns positive in the recovery phase.

Question 13

Which of the following best explains why the unemployment rate is considered a lagging indicator?
A. It increases immediately when a recession begins.
B. It reflects economic changes after trends are already established.
C. It is highly volatile and not linked to economic conditions.

Answer 13

Correct Answer: B

Explanation:
B is correct: The unemployment rate typically rises after a recession has begun and falls after a recovery is underway. It reacts with a lag to shifts in the business cycle.
A is incorrect: It does not increase immediately; there’s usually a delay.
C is incorrect: The unemployment rate is closely tied to economic performance and is not just randomly volatile.

Question 14

Which of the following is most likely to happen during a severe economic downturn (recession)?
A. Firms increase capital expenditures.
B. The central bank raises interest rates.
C. Consumer spending decreases due to uncertainty.

Answer 14

Correct Answer: C

Explanation:
C is correct: During recessions, households reduce consumption due to fear of job loss, lower income, and economic uncertainty.
A is incorrect: Firms typically cut back on capital spending during downturns.
B is incorrect: Central banks are more likely to cut interest rates during a recession to stimulate demand.

Question 15

Question 1:
Which of the following best describes the behavior of lenders during an economic contraction?
A. Lenders are more willing to extend credit at lower interest rates.
B. Lenders become more risk-averse and charge higher interest rates.
C. Lenders increase credit availability to stimulate the economy.

Answer 15

Correct Answer: B

Explanation:
B is correct. During economic contractions, lenders become more cautious (risk-averse) and typically charge higher interest rates to compensate for increased credit risk.
A is incorrect. This describes lender behavior during expansions, not contractions.
C is incorrect. Lenders do not increase credit availability voluntarily during contractions — credit becomes tighter, not looser.

Question 16

Which of the following scenarios most likely illustrates a credit-driven asset bubble?
A. A central bank raises interest rates to curb inflation.
B. Investors use borrowed funds to buy houses expecting prices to keep rising.
C. Businesses cut investment spending due to pessimistic forecasts.

Answer 16

Correct Answer: B

Explanation:
B is correct. This is a classic case of a credit-driven bubble—borrowers speculate on future price increases, driving asset prices beyond fundamental value.
A is incorrect. This is monetary policy tightening, not a bubble.
C is incorrect. This is an example of contractionary behavior, not speculative excess.

Question 17

What is a likely consequence of loose credit conditions during an economic expansion?
A. Strong GDP growth with low asset price volatility
B. Increased investment driven by risk aversion
C. Asset prices inflating beyond fundamentals, leading to bubbles

Answer 17

Correct Answer: C

Explanation:
C is correct. Easy credit allows more borrowing and speculative investment, which can inflate asset prices excessively.
A is incorrect. Loose credit can lead to high asset price volatility, not low.
B is incorrect. Loose credit increases risk-taking, not risk aversion.

Question 18

Compared to business cycles, credit cycles are generally:
A. Equal in duration and usually synchronized
B. Shorter in duration but more volatile
C. Longer in duration and not always aligned with business cycles

Answer 18

Correct Answer: C

Explanation:
C is correct. Historical data shows that credit cycles tend to last longer than business cycles and do not always coincide with them.
A is incorrect. Credit and business cycles are not always synchronized.
B is incorrect. Credit cycles are typically longer, not shorter.

Question 19

During which phase of the credit cycle are banks most likely to reduce lending and increase credit standards?
A. Recovery
B. Expansion
C. Contraction

Answer 19

Correct Answer: C

Explanation:
C is correct. During a contraction, banks reduce lending due to higher credit risk and economic uncertainty.
A is incorrect. In recovery, credit availability usually begins to improve.
B is incorrect. During expansion, credit is easier to obtain, not harder.

Question 20

How can credit cycles amplify the effects of business cycles?
A. By ensuring stable long-term interest rates
B. By making expansions stronger and contractions deeper
C. By offsetting inflation through tighter lending during growth

Answer 20

Correct Answer: B

Explanation:
B is correct. Loose credit can inflate booms, and tight credit can exacerbate downturns, thereby amplifying business cycles.
A is incorrect. Credit cycles tend to fluctuate, not stabilize rates.
C is incorrect. Credit tightening may slow inflation, but this is not the main amplification effect.

Question 21

Which of the following best explains why the financial crisis of 2007–2009 is considered a credit cycle event?
A. It was triggered by government austerity policies.
B. It followed a sharp rise in consumer spending and productivity.
C. It was preceded by loose lending standards and excessive borrowing in mortgage markets.

Answer 21

Correct Answer: C

Explanation:
C is correct. The 2007–2009 crisis was driven by excessive credit, especially subprime mortgages, which led to a housing bubble and massive defaults.
A is incorrect. Government austerity was not the trigger.
B is incorrect. While consumer spending rose, it was credit-fueled, not productivity-driven.

Question 22

When an economic expansion is approaching its peak, the inventory-sales ratio typically:
A. Decreases below normal levels as firms anticipate higher future sales
B. Increases above normal levels due to slower sales growth and accumulating unsold inventories
C. Remains at normal levels as firms maintain steady production schedules

Answer 22

Correct Answer: B
Explanation:

As an expansion approaches its peak, sales growth begins to slow while production continues at previous levels, causing unsold inventories to accumulate. This results in the inventory-sales ratio increasing above its normal level, signaling potential economic weakness ahead.
Option A is incorrect because firms don’t typically reduce inventory levels when approaching a peak; instead, they experience unplanned inventory accumulation.
Option C is incorrect because the inventory-sales ratio does fluctuate with business cycles and doesn’t remain constant at normal levels during turning points.

Question 23

An analyst reviewing GDP growth statistics during a business cycle peak might be misled because:
A. GDP statistics exclude inventory changes from the calculation
B. Unplanned inventory increases are counted as economic output in GDP, potentially masking underlying economic weakness
C. GDP growth rates are typically adjusted for seasonal inventory fluctuations

Answer 23

Correct Answer: B
Explanation:

GDP statistics count all inventory increases as economic output, whether planned or unplanned. During a peak, unplanned inventory accumulation due to slowing sales is still counted as positive GDP contribution, which can mask the underlying economic weakness indicated by rising inventory-sales ratios.
Option A is incorrect because inventory changes are included in GDP calculations as part of investment.
Option C is incorrect because while seasonal adjustments exist, the issue here is about unplanned vs. planned inventory changes, not seasonal patterns.

Question 24

When a business cycle contraction reaches its trough, firms typically experience:
A. An inventory-sales ratio that increases above normal levels
B. Stable inventory levels that match current sales demand
C. An inventory-sales ratio that decreases below normal levels as sales growth accelerates

Answer 24

Correct Answer: C
Explanation:

At the trough, firms have reduced production to adjust for lower sales demand. When sales growth begins to accelerate, inventories become depleted more quickly, causing the inventory-sales ratio to fall below normal levels until firms can increase production to rebuild inventories.
Option A is incorrect because this describes the situation at a peak, not a trough.
Option B is incorrect because firms typically find themselves with insufficient inventory relative to the new higher sales demand at the trough.

Question 25

In response to short-term fluctuations in business activity, firms will most likely first adjust their operations by: A. Hiring or laying off workers immediately to match production needs B. Buying or selling plant and equipment to adjust production capacity C. Changing work hours and intensity of current workers and existing capital utilization

Answer 25

Correct Answer: C Explanation: Firms initially respond to business fluctuations by adjusting how intensively they use existing resources - changing worker hours (overtime/reduced hours), output per hour, and capital utilization rates. This is less costly than hiring/firing or buying/selling equipment. Option A is incorrect because hiring and firing workers is costly and damages morale, so firms only do this when changes appear likely to persist. Option B is incorrect because frequently buying and selling plant and equipment is very costly, so this is typically a last resort.

Question 26

During a persistent economic expansion, firms will most likely: A. Immediately increase physical capacity by purchasing additional plant and equipment B. First increase utilization of existing resources, then invest in additional plant and equipment as the expansion continues C. Maintain constant production levels to avoid overinvestment

Answer 26

Correct Answer: B Explanation: Firms follow a sequential approach: first maximizing use of existing resources (labor and capital), then investing in additional capacity only when the expansion appears likely to persist. This minimizes costs and risks associated with premature capacity expansion. Option A is incorrect because firms don't immediately invest in new capacity; they first maximize existing resource utilization. Option C is incorrect because firms do increase production during expansions, just in a phased approach.

Question 27

During economic contractions, firms will most likely adjust their physical capital capacity by: A. Selling plant and equipment outright to reduce fixed costs B. Reducing maintenance spending and delaying equipment replacement C. Purchasing newer, more efficient equipment to reduce operating costs

Answer 27

Correct Answer: B Explanation: During contractions, firms typically reduce physical capacity indirectly by spending less on maintenance or delaying replacement of aging equipment, rather than selling assets outright. This allows for easier capacity restoration when conditions improve. Option A is incorrect because firms generally do not sell plant and equipment outright during contractions, as this would make recovery more difficult and costly. Option C is incorrect because firms typically reduce capital expenditure during contractions, not increase it through equipment purchases.

Question 28

The primary reason firms avoid making immediate workforce adjustments in response to business cycle fluctuations is: A. Legal restrictions that prevent rapid hiring and firing decisions B. The high direct costs and negative impact on employee morale and loyalty C. Government incentives that encourage maintaining stable employment levels

Answer 28

Correct Answer: B Explanation: Firms avoid immediate workforce adjustments because of both the direct costs involved (recruiting, training, severance) and the indirect costs of damaged employee morale and loyalty, which can hurt long-term productivity and retention. Option A is incorrect because while some legal restrictions may exist, the primary concern is economic rather than legal. Option C is incorrect because government incentives are not the main driver of this business decision; it's primarily about cost management and maintaining workforce quality.

Question 29

As an economy nears the peak of an expansion, firms are most likely to experience: A. A decline in the inventory-sales ratio B. Accelerated sales growth C. Unplanned inventory accumulation

Answer 29

Correct Answer: C Explanation: C is correct. As the expansion nears its peak, sales growth slows, leading to unsold inventory accumulating. This raises the inventory-sales ratio, signaling a turning point. A is incorrect. A decline in the inventory-sales ratio typically occurs at the trough, not the peak. B is incorrect. Sales growth slows as the expansion peaks, it does not accelerate.

Question 30

Which of the following best describes how firms typically react first to short-term demand fluctuations? A. Lay off or hire new workers B. Increase or reduce use of existing labor and capital C. Sell or purchase plant and equipment

Answer 30

Correct Answer: B Explanation: B is correct. Firms initially adjust current labor hours and equipment usage (e.g., overtime or maintenance deferrals) instead of making costly structural changes. A is incorrect. Hiring or firing workers is a second step and usually happens if the change appears persistent. C is incorrect. Buying or selling physical capital is costly and only occurs during sustained expansions or contractions.

Question 31

Which economic indicator might mislead an analyst into interpreting economic strength when a slowdown is actually beginning? A. GDP growth B. Inventory-sales ratio C. Unemployment rate

Answer 31

Correct Answer: A Explanation: A is correct. GDP includes all output—even unplanned inventory buildup, which can inflate GDP despite underlying weakness. B is incorrect. The inventory-sales ratio is actually a better indicator of demand conditions. C is incorrect. The unemployment rate typically lags the business cycle.

Question 32

A decline in the inventory-sales ratio below its normal level typically signals: A. The peak of an expansion B. The trough of a contraction C. An increase in capital spending

Answer 32

Correct Answer: B Explanation: B is correct. When demand recovers at the end of a contraction, sales outpace inventory restocking, lowering the ratio. A is incorrect. At the peak, the inventory-sales ratio rises due to unsold inventory. C is incorrect. Capital spending typically lags behind initial demand recovery.

Question 33

Which of the following best explains why firms may delay hiring during early recovery stages? A. Fear of government regulation B. Difficulty finding workers C. High cost and morale impact of frequent workforce changes

Answer 33

Correct Answer: C Explanation: C is correct. Firms prefer to avoid costly and disruptive hiring/firing cycles, so they initially adjust hours and productivity. A is incorrect. This is not a direct or primary factor in hiring decisions during recovery. B is incorrect. While it can happen, it's not the systematic reason given in the CFA curriculum.

Question 33

Which of the following actions is least likely taken by firms during early stages of contraction? A. Reduce overtime hours B. Sell plant and equipment C. Use physical capital less intensively

Answer 33

Correct Answer: B Explanation: C is Correct. Firms usually do not sell capital assets during early contractions due to transaction costs and future uncertainty. A is Incorrect. Reducing overtime is a common first step in cutting production. C is Incorrect. Firms scale back usage of existing machinery before considering asset sales.

Question 34

Which business cycle phase is most associated with investment in new plant and equipment? A. Late contraction B. Mid-expansion C. Early recovery

Answer 34

Correct Answer: B Explanation: B is Correct. During mid-expansion, firms become confident that growth is sustainable, justifying capital investment. A is Incorrect. Firms typically cut back during contractions. C is Incorrect. Early recovery is usually met with cautious labor and capital adjustments, not investment surges.

Question 34

Firms adjust capital usage by delaying replacement of old equipment primarily to: A. Signal credit strength to lenders B. Reduce current production capacity C. Increase depreciation charges

Answer 34

Correct Answer: B Explanation: B is Correct. Delaying replacement lowers active capital stock, effectively reducing capacity without outright selling assets. A is Incorrect. Firms do not typically use this method to signal anything. C is Incorrect. Depreciation is non-cash and unrelated to production goals.

Question 35

What is the typical order of firm responses to persistent changes in business activity? A. Hire/fire workers → Adjust overtime → Adjust capital use B. Adjust overtime → Adjust capital use → Hire/fire workers C. Adjust capital use → Hire/fire workers → Adjust overtime

Answer 35

Correct Answer: B Explanation: B is correct. Firms first adjust overtime/labor utilization, then capital use, and finally alter headcount when the trend persists. A & C are incorrect. These sequences do not align with standard business reaction patterns outlined in the curriculum.

Question 36

Which of the following best describes the inventory-sales ratio during steady economic growth? A. Increasing above normal B. Decreasing below normal C. Tending toward a normal level

Answer 36

Correct Answer: C Explanation: C is correct. During stable growth, firms manage inventory efficiently, keeping the inventory-sales ratio near normal. A is incorrect. An increase occurs near the peak, not during stable growth. B is incorrect. A decrease typically happens after a trough, when sales pick up.

Question 37

Which of the following components of GDP is the largest and most directly influenced by household income levels? A. Investment B. Net exports C. Consumer spending

Answer 37

Correct Answer: C Explanation: Consumer spending is the largest component of GDP and is heavily influenced by current and expected household income. A is incorrect. While important, it is smaller than consumption and more sensitive to interest rates and business expectations. B is incorrect. Typically, smaller and influenced by global factors and exchange rates.

Question 38

Spending on which of the following is most sensitive to the business cycle? A. Durable goods B. Services C. Nondurable goods

Answer 38

Correct Answer: A Explanation: Durable goods (e.g., cars, appliances) are high-ticket items often postponed in downturns, making them highly cyclical. B is incorrect. Vary, but some like healthcare and telecom are less cyclical. C is incorrect. Like groceries, they are essential and stable across cycles.

Question 39

Which best explains why consumer spending increases during expansions? A. Lower inflation expectations B. Higher interest rates C. Rising income and confidence

Answer 39

Correct Answer: C Explanation: Consumer spending rises during expansions due to higher income and greater confidence in the economy. A is incorrect. Might affect saving, but not a direct driver of consumption. B is incorrect. Typically dampens consumption rather than encouraging it.

Question 40

Housing activity is most positively correlated with: A. High interest rates B. Strong speculative demand C. Falling incomes

Answer 40

Correct Answer: B Explanation: Speculative activity can drive housing booms as buyers anticipate future price increases. A is incorrect. High rates discourage borrowing and reduce activity. C is incorrect. Falling incomes reduce purchasing power, hurting demand.

Question 41

A rise in mortgage rates will most likely: A. Increase home construction activity B. Reduce demand for new homes C. Have no effect on housing prices

Answer 41

Correct Answer: B Explanation: Higher mortgage rates make borrowing costlier, reducing affordability and demand. A is incorrect. Construction would decrease, not increase. C is incorrect. Prices typically fall due to weaker demand.

Question 42

During economic contractions, consumers are most likely to delay purchases of: A. Food and toiletries B. Automobile and furniture C. Mobile phone plans and health insurance

Answer 42

Correct Answer: B Explanation: Durable goods are often postponed in downturns due to uncertainty. A is incorrect. Essentials, purchased regardless of the cycle. C is incorrect. These are often ongoing necessities or obligations.

Question 43

In the late stage of an expansion, housing activity may decline despite rising incomes because: A. Interest rates usually drop B. Construction slows for demographic reasons C. Housing prices rise faster than incomes

Answer 43

Correct Answer: C Explanation: When home prices outpace income growth, affordability declines, reducing demand. A is incorrect. Interest rates tend to rise, not drop. B is incorrect. Demographics are long-term factors, not cyclical.

Question 44

Which of the following most likely triggers a housing sector downturn due to speculation? A. Strong income growth B. Higher lending standards C. Oversupply from overbuilding

Answer 44

Correct Answer: C Explanation: Speculative booms can lead to overbuilding, creating oversupply and a subsequent downturn. A is incorrect. Supports demand. B is incorrect Limits speculation but isn’t a direct result of it.

Question 45

Which of the following increases a country’s imports? A. Decreasing domestic GDP B. Strong foreign economic growth C. Rising domestic GDP

Answer 45

Correct Answer: C Explanation: Higher domestic GDP increases consumer and business demand for foreign goods. A is incorrect. Would reduce imports. B is incorrect. Affects exports, not imports.

Question 46

Exports are most positively influenced by: A. Weak domestic currency B. Strong domestic demand C. Domestic inflation

Answer 46

Correct Answer: A Explanation: A weaker currency makes domestic goods cheaper to foreign buyers, increasing exports. B is incorrect. Encourages imports. C is incorrect. Can hurt competitiveness abroad.

Question 47

Which situation will likely lead to a decrease in a country’s exports? A. Stronger trading partner GDP B. Decline in exchange rate C. Appreciation of domestic currency

Answer 47

Correct Answer: C Explanation: Currency appreciation makes exports more expensive for foreigners. A is incorrect. Would boost exports. B is incorrect. Would make exports cheaper and likely increase them.

Question 48

Persistent exchange rate trends, rather than short-term volatility, affect trade because: A. Businesses plan based on long-term trends B. Governments ignore short-term volatility C. Consumers react more to inflation than currency

Answer 48

Correct Answer: A Explanation: Businesses make decisions like pricing and sourcing based on longer-term exchange rate movements. B is incorrect. Not always true; many intervene in FX markets. C is incorrect. Not related to this concept.

Question 49

Which of the following is least cyclical? A. Restaurant meals B. Automobiles C. Household cleaning products

Answer 49

Correct Answer: C Explanation: Nondurable goods like cleaning products are essentials and less affected by the business cycle. A & B are incorrect. Discretionary or durable, both highly cyclical.

Question 50

Which sector includes both discretionary and non-discretionary components? A. Durable goods B. Services C. Nondurable goods

Answer 50

Correct Answer: B Explanation: Services include both travel (discretionary) and healthcare (non-discretionary). A & C are incorrect. Tend to be either one or the other.

Question 51

Which economic indicator best predicts consumer spending behavior? A. Interest rate differentials B. Current and expected income levels C. Trade balance

Answer 51

Correct Answer: B Explanation: Income levels and expectations are key drivers of consumer spending. A is incorrect. More relevant to investment. C is incorrect. Reflects trade, not consumption.

Question 52

A country's exports fall sharply despite a weakening currency. The most likely explanation is: A. Falling foreign GDP B. Rising interest rates domestically C. Rising domestic inflation

Answer 52

Correct Answer: A Explanation: Weak foreign demand reduces exports, regardless of favorable currency trends. B & C are incorrect. Less directly impactful in this case.

Question 53

What describes the interaction between GDP growth and trade balance? A. Faster GDP growth increases exports B. Domestic GDP growth typically increases imports C. Strong domestic GDP reduces import demand

Answer 53

Correct Answer: B Explanation: More income leads to more imports. A is incorrect. Depends more on foreign GDP growth. C is Incorrect. it increases import demand.

Question 54

Which of the following has the most immediate impact on trade activity? A. Currency trends B. Tariff policies C. GDP growth levels

Answer 54

Correct Answer: C Explanation: GDP changes affect imports and exports directly and quickly. A is incorrect. Effects are slower and long-term. B is incorrect. May take time to implement or respond to.

Question 55

Which of the following best describes economic activity during the trough of a business cycle? A. GDP growth turns negative, and inflation begins rising. B. Unemployment rises rapidly, and consumer spending falls. C. GDP growth turns positive, and spending on durable goods may increase.

Answer 55

Correct Answer: C Explanation: C is correct. A trough marks the end of a recession. GDP growth turns from negative to positive, and spending on consumer durable goods and housing may increase. A is incorrect. At the trough, GDP growth turns positive, not negative. B is incorrect. Unemployment may remain high, but it generally stabilizes or improves. Consumer spending begins to rise slightly.

Question 56

Which of the following indicators is most likely to occur during the expansion phase of the business cycle? A. Declining investment in producer’s equipment B. Decreasing inflation C. Increasing home construction

Answer 56

Correct Answer: C Explanation: C is correct. During an expansion, businesses invest in producer’s equipment and there is increased home construction due to higher economic confidence. A is incorrect. Investment typically increases, not declines, during expansions. B is incorrect. Inflation tends to increase during expansions as demand rises.

Question 57

During the peak phase of the business cycle, which of the following is most accurate? A. GDP growth accelerates sharply. B. Consumer spending and investment continue increasing but at slower rates. C. Unemployment begins to rise sharply.

Answer 57

Correct Answer: B Explanation: B is correct. At the peak, economic activity slows. Consumer spending and investment still rise but at slower rates. A is incorrect. GDP growth typically slows, not accelerates, at the peak. C is incorrect. Unemployment typically remains low, though hiring slows.

Question 58

Which of the following trends is typically observed during a recession? A. Imports increase due to falling domestic prices. B. Unemployment decreases due to falling wages. C. Business investment and consumer spending both decline.

Answer 58

Correct Answer: C Explanation: C is correct. Recessions are marked by falling business investment, consumer spending, and rising unemployment. A is incorrect. Imports typically decrease due to lower domestic income. B is incorrect. Unemployment typically increases, not decreases.

Question 58

Which of the following best describes inflation behavior during a contraction? A. Increases rapidly due to cost-push effects B. Increases initially but decreases with a lag C. Decreases immediately in response to lower demand

Answer 58

Correct Answer: B Explanation: B is correct. Inflation typically decreases with a lag during contractions due to sticky prices. A is incorrect. Cost-push inflation is not the dominant force in recessions. C is incorrect. Prices don’t fall immediately due to wage contracts and other rigidities.

Question 59

In the early stage of an expansion, companies are most likely to: A. Reduce the use of temporary workers B. Increase overtime and hire permanent workers C. Increase the use of temporary and overtime workers before full hiring resumes

Answer 59

Correct Answer: C Explanation: C is correct. In early recovery, firms cautiously use temporary and overtime labor before committing to full-time hires. A is incorrect. Temporary workers are used more, not less. B is incorrect. Hiring permanent workers usually happens later in the expansion.

Question 60

Which of the following best explains why imports rise during expansions? A. Domestic income is falling, creating demand for cheaper goods B. Domestic income rises, increasing demand for all goods including foreign C. Currency depreciates, encouraging imports

Answer 60

Correct Answer: B Explanation: B is correct. Rising domestic income during expansions increases imports. A is incorrect. Domestic income rises, not falls. C is incorrect. A stronger currency typically encourages imports.

Question 61

Which of the following is most characteristic of the contraction phase of a business cycle? A. Increase in consumer confidence and durable goods spending B. Decrease in hours worked and increase in unemployment C. Sharp increase in housing starts

Answer 61

Correct Answer: B Explanation: B is correct. Contractions are marked by falling hours worked and rising unemployment. A is incorrect. Consumer confidence and durable goods spending fall during contractions. C is incorrect. Housing starts usually decline during contractions.

Question 62

Which of the following typically occurs at the peak of the business cycle? A. Unemployment rate begins to rise rapidly B. Inflation rate decreases due to lower spending C. Hiring slows despite low unemployment

Answer 62

Correct Answer: C Explanation: C is correct. At the peak, firms slow hiring, though unemployment remains low. A is incorrect. Unemployment remains low, it doesn’t rise rapidly yet. B is incorrect. Inflation often continues to increase at the peak.

Question 63

Which of the following is least likely during the trough phase? A. GDP begins growing again B. Inflation accelerates quickly C. Durable goods purchases begin to recover

Answer 63

Correct Answer: B Explanation: B is correct. Inflation is usually moderate or falling at the trough, not accelerating. A is incorrect. GDP starts turning positive in a trough. C is incorrect. As confidence improves, consumers begin to make durable goods purchases again.