Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does the business cycle describe?

1. A consistent rise in national income without fluctuations

2. A sequence of rapid growth followed by recession

3. Constant levels of demand and supply

4. An economy operating at full capacity at all times

The correct answer is: A sequence of rapid growth followed by recession

The business cycle describes the fluctuations in economic activity that an economy experiences over time. It typically involves a sequence of phases, including expansion (or growth), peak, contraction (or recession), and trough. The correct answer points to the characteristic pattern often seen within the business cycle, where periods of rapid economic growth are followed by downturns or recessions. This cyclical nature highlights how economies can experience varying levels of growth and contraction based on numerous factors, such as changes in consumer confidence, investment rates, and external economic conditions. Other options do not accurately capture the nature of the business cycle. The idea of a consistent rise in national income without fluctuations fails to recognize the inherent variability and cyclical nature of economic activity. Similarly, constant levels of demand and supply imply stability rather than the dynamic shifts that characterize the business cycle. Finally, the concept of an economy operating at full capacity at all times overlooks the natural variations and inefficiencies that occur as part of economic cycles.