Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which term refers to the process of economic expansion followed by contraction?

1. Deflationary gap

2. Inflationary gap

3. Business cycle

4. Trade surplus

The correct answer is: Business cycle

The term that refers to the process of economic expansion followed by contraction is the business cycle. The business cycle is a fundamental concept in economics that describes the natural rise and fall of economic growth over time. It consists of four phases: expansion, peak, contraction (or recession), and trough. During the expansion phase, economic activity increases, leading to higher levels of production, employment, and consumer spending. However, this growth is not sustainable forever and is typically followed by a peak, where the economy reaches its maximum output. Afterward, the economy tends to contract, leading to a slowdown in growth, reduced investment, and increased unemployment, marking the contraction phase. This cyclical nature helps to understand how economies function over time, and recognizing the business cycle is crucial for policymakers and businesses for planning and decision-making. Deflationary and inflationary gaps relate to variations from potential output and are not directly encompassing of the entire expansion and contraction process. A trade surplus pertains specifically to the balance of trade and does not address cyclical economic fluctuations. Thus, the business cycle is the best choice that captures the complete phenomenon of economic expansion followed by contraction.