Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What characterizes the trade cycle?

1. A constant rate of economic growth

2. A fluctuation in the rate of growth of real GDP

3. A direct relationship between unemployment and inflation

4. A stable banking system

The correct answer is: A fluctuation in the rate of growth of real GDP

The trade cycle is characterized by fluctuations in the rate of growth of real GDP. This cycle typically consists of four phases: expansion, peak, contraction, and trough. During the expansion phase, economic activity increases, leading to a rise in real GDP. As the economy nears its capacity, it reaches a peak where growth slows down. Following the peak, the economy enters a contraction phase, marked by declining real GDP, which may eventually lead to a trough, denoting the lowest point of economic activity before recovery begins again. This understanding highlights the dynamic and cyclical nature of economic growth, indicating that the economy does not grow at a constant rate but rather experiences periods of both growth and decline. The other options do not accurately capture this characteristic: a constant rate of economic growth suggests stability rather than fluctuation; a direct relationship between unemployment and inflation reflects a different aspect of economic theory; and a stable banking system relates to financial institutions rather than the broader economic growth cycle.