Canadian Securities Course (CSC) Level 1 Practice Exam

What are the characteristics of the Contraction Phase?

1. Interest rates fall, triggering bond rally

2. Inflation falls, triggering bond rally

3. Layoffs, negative GDP

4. Stocks rally, people spend more money

The correct answer is: Layoffs, negative GDP

During the Contraction Phase of the economic cycle, the economy experiences a slowdown marked by reduced consumer spending and declining business investment. One of the key characteristics of this phase is an increase in unemployment, which often results in layoffs as companies seek to cut costs in response to decreased demand for goods and services. This can lead to negative Gross Domestic Product (GDP) growth, indicating that the economy is not expanding and may even be contracting. In this phase, businesses face challenges such as lower revenues and reduced profits, which can further exacerbate layoffs and economic slowdown. The emphasis on cost-cutting and efficiency often leads to a decrease in overall economic activity, thus reflecting the critical dynamics present during periods of contraction. Understanding these characteristics helps in assessing economic conditions and predicting market behaviors during different phases of the economic cycle.