The Business Cycle worksheet
The answer key prints on its own page, so hand out everything before it.
The Business Cycle: practice worksheet
1. The four phases of the business cycle, in order, are:
- (A) Peak, trough, expansion, contraction
- (B) Expansion, peak, contraction, trough
- (C) Trough, contraction, peak, expansion
- (D) Contraction, expansion, trough, peak
2. A recession is generally defined as:
- (A) Any decline in stock market prices
- (B) Two consecutive quarters of declining real GDP
- (C) An unemployment rate above 5%
- (D) A period of falling nominal GDP
3. Which of the following is a leading economic indicator?
- (A) Unemployment rate
- (B) Real GDP
- (C) Stock market prices
- (D) Average duration of unemployment
4. At the peak of the business cycle, which of the following is most likely true?
- (A) Unemployment is at its highest level
- (B) The economy is producing below potential output
- (C) Inflation is typically rising and the economy is at or beyond full employment
- (D) The Federal Reserve is lowering interest rates
5. Unemployment is classified as a lagging indicator because:
- (A) It rises before a recession begins
- (B) It falls before a recession begins
- (C) It continues to rise even after the economy begins recovering
- (D) It is unrelated to the business cycle
6. During a contraction, which is most likely to occur?
- (A) Rising business investment
- (B) Increasing consumer confidence
- (C) Falling output and rising unemployment
- (D) Increasing government tax revenue
7. The long-run growth trend in a business cycle diagram represents:
- (A) The maximum possible output of the economy
- (B) The economy's average growth rate over time, smoothing out cyclical fluctuations
- (C) The inflation rate over time
- (D) Government spending as a share of GDP
8. An inverted yield curve (short-term rates higher than long-term rates) is typically considered:
- (A) A coincident indicator of current economic strength
- (B) A lagging indicator of past recessions
- (C) A leading indicator of a potential recession
- (D) An indicator that the Fed is running expansionary policy
9. In the AD/AS model, an economic expansion is best represented by:
- (A) A leftward shift of aggregate demand
- (B) A rightward shift of aggregate demand along the SRAS curve
- (C) A leftward shift of short-run aggregate supply
- (D) Movement along the LRAS curve
10. What body officially declares the beginning and end of US recessions?
- (A) The Federal Reserve
- (B) The Bureau of Labor Statistics
- (C) The National Bureau of Economic Research (NBER)
- (D) The Congressional Budget Office
The Business Cycle: answer key
1. (B) The cycle runs: expansion (output rising), peak (the high point where growth crests), contraction (output falling), trough (the low point). After the trough, a new expansion begins and the cycle repeats.
2. (B) The NBER uses a broader set of criteria, but the standard shorthand is two consecutive quarters of declining real GDP. The distinction between real and nominal matters: nominal GDP can fall simply because of deflation, while real GDP adjusts for price changes and reflects actual output.
3. (C) Stock prices tend to decline before recessions begin and rise before recoveries materialize, which is why they qualify as a leading indicator. The unemployment rate is a lagging indicator because it continues rising even after GDP has begun to recover. Real GDP is a coincident indicator. Average duration of unemployment is also a lagging indicator.
4. (C) At the peak, the economy operates at or above potential output. Demand presses against productive capacity, which pushes inflation upward. The Fed is typically raising rates during this phase to cool the economy, not lowering them. Option A describes the trough, not the peak. Option B describes a recessionary gap.
5. (C) Firms are cautious about rehiring after a downturn. Even after GDP starts growing again, employers wait to see sustained demand before adding headcount. Unemployment continues to climb for several months into the recovery before it finally turns around. That delay is what makes it a lagging indicator.
6. (C) Contractions are defined by declining real GDP. Firms cut production and lay off workers, so output falls and unemployment rises. Business investment declines as firms postpone expansion plans. Consumer confidence drops. Tax revenue falls because incomes and profits shrink. Options A, B, and D all describe expansion characteristics.
7. (B) The trend line shows the economy's potential growth path, the trajectory GDP would follow if there were no cyclical swings above and below it. Actual GDP oscillates around this trend, rising above it during late expansions and falling below it during contractions.
8. (C) The yield curve has inverted before every U.S. recession since 1955, making it one of the most closely watched leading indicators. An inversion signals that investors expect future economic weakness and lower interest rates ahead, which is why they accept lower yields on long-term bonds than on short-term ones.
9. (B) An expansion corresponds to aggregate demand increasing and shifting rightward. The economy moves along the SRAS curve to a higher level of output, and depending on proximity to full employment, the price level may also rise. Option A would represent a contraction. Option C would represent a negative supply shock. Option D does not describe a shift in either curve.
10. (C) The NBER's Business Cycle Dating Committee examines a range of economic indicators, including employment, income, production, and sales, before announcing the official dates of peaks and troughs. These announcements typically come months after the actual turning points have occurred.