Final answer:
The yield curve tends to be inverted at the peak of the business cycle, suggesting an expected downturn. Recessions usually have higher unemployment and lower inflation, while strong growth tends to lower unemployment but raise inflation. Keynesian economics suggests expansionary fiscal policy to counter recessions.
Step-by-step explanation:
The yield curve tends to be inverted at the peak of the business cycle. An inverted yield curve indicates that short-term interest rates are higher than long-term rates. This phenomenon typically suggests that investors expect a downturn in the economy, as the cost of borrowing is more expensive in the short term compared with long-term investments. During an economic peak, investors may predict that a recession will follow, leading to future decreases in interest rates to stimulate the economy. Consequently, they are willing to accept lower yields for long-term security.
Historically, recessions often accompany higher unemployment and lower inflation, while rapid economic growth often brings lower unemployment but higher inflation. Keynesian macroeconomics would recommend expansionary fiscal policy during a recession, such as tax cuts or increases in government spending, to shift the aggregate demand curve to the right, promoting full employment and potential GDP.