Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What commonly follows a peak in the business cycle?

1. Expansion

2. Recovery

3. Contraction

4. Stability

The correct answer is: Contraction

The correct answer is contraction, which refers to a phase in the business cycle characterized by a decline in economic activity. After reaching a peak, which is the high point of economic growth, the economy can experience a contraction as various factors, such as reduced consumer spending, rising interest rates, or declining business investments, lead to a slowdown in growth. During this period, economic indicators such as GDP, employment rates, and industrial production typically decline. Understanding the dynamics of the business cycle is crucial, as it helps businesses and policymakers anticipate changes in the economy and make informed decisions. In contrast, expansion refers to the period of economic growth that occurs before a peak, recovery signifies a return to growth after a contraction, and stability indicates a period of steady growth without significant fluctuations—none of which capture the immediate aftermath of a peak like contraction does.