Question

A business cycle that experiences a period of contraction for two quarters in a row supports which conclusion about the condition of the economy?

1) the economy is likely to experience rapid expansion.
2) the economy is likely to recover from a depression.
3) the economy is likely to suffer from a recession.
4) the economy is likely to hit its trough.

Answer 1

A period of economic contraction for two consecutive quarters typically indicates a recession, which is defined as a period of significant economic decline from peak to trough lasting more than a few months. Therefore, the correct option is 3.

Step-by-step explanation:

A business cycle experiencing a period of contraction for two quarters in a row signifies an economy that is likely to suffer from a recession. A recession is defined by the National Bureau of Economic Research (NBER) as the phase of the business cycle from peak to trough, where there is a significant decline in economic activity across the economy lasting more than a few months. It is typically recognized after observing a decrease in key economic indicators, such as real GDP, income, employment, manufacturing, and retail sales. Given the definitions and historical context provided, when an economy experiences a contraction for two consecutive quarters, it is generally indicative of a recession rather than an expansion or a recovery from a depression. The recovery phase commences once the economy hits its trough and begins to rebound, leading to a phase of expansion. It is important to understand the pattern of recessions and expansions to anticipate future economic conditions.