Question

In the three-phase business cycle, the prosperity phase is always followed immediately by _____. (LO1) a) recovery b) the trough c) 5 percent d) impossible to find

Short answer

b) the trough

Step-by-step solution

Identify the Three Phases of the Business Cycle

The three phases of the business cycle are Recovery (or Expansion), Prosperity (or Peak), and Recession (or Contraction). Understanding these phases and their sequence will help us find the phase that comes immediately after the prosperity phase.

Determine the Phase After Prosperity

With the knowledge of the sequence of phases in the three-phase business cycle, we can determine that after the prosperity (peak) phase, the next phase is the recession (contraction) phase.

Match the Answer with the Given Choices

Now that we know that the recession phase follows the prosperity phase, we can match our answer to the available choices to see which one is correct: a) recovery b) the trough c) 5 percent d) impossible to find In this case, none of the answer choices directly mention "recession," but the closest option is "b) the trough," as the trough represents the lowest point in the business cycle, which occurs during the recession phase of the cycle. Therefore, the correct answer is: b) the trough

Key concepts

Prosperity Phase

The Prosperity Phase, often referred to as the Peak Phase, marks the point in a business cycle when economic activity is at its highest. During prosperity, the economy experiences healthy growth, high levels of employment, and increased production and consumer spending. Companies thrive as demand for goods and services rises, leading to higher profits.

In this phase, there are several characteristic elements:

• Unemployment rates are typically low, as businesses hire more to keep up with high demand.
• Consumer confidence is high, encouraging people to spend and invest, further fueling economic growth.
• Inflation may start to increase as demand outpaces supply.

Although prosperity is beneficial, it can lead to issues if it persists too long. Rising inflation might force central banks to increase interest rates to prevent the economy from overheating. This eventually contributes to a transition into the next cycle phase.

Recession Phase

Following the Prosperity Phase is the Recession Phase, also known as the Contraction Phase. This stage is characterized by a decline in economic activity. Businesses may see reduced profits due to falling demand, leading to cost-cutting measures and layoffs.

Key characteristics of a recession include:

• Increasing unemployment rates as companies reduce their workforce.
• Decreased consumer spending, as confidence in the economy wanes.
• Reduced levels of production and trade.

The economy contracts as both businesses and consumers become more cautious. This phase often begins when inflation reaches high levels, prompting higher interest rates and reduced borrowing. Understanding this phase helps in preparing for economic slowdowns and planning for future recoveries.

Trough Phase

The Trough Phase marks the lowest point in the business cycle. During this phase, the recession ends, and the economy begins to recover from a prolonged decline in activity. The trough can be seen as a turning point towards recovery and expansion.

In the Trough Phase, we usually observe:

• Stabilization of economic factors, such as lowered inflation rates and interest rates adjusted to encourage borrowing and spending.
• An increase in investments and gradual upturn in consumer confidence.
• Businesses begin to hire again, as signs of recovery become apparent.

Although it signifies a challenging time, the trough is crucial as it signals the possibility of transition towards recovery and expansion. Economic policies often play a key role in facilitating the move out of the trough by promoting financial stability and encouraging investments.