What stage of the business cycle is characterized by declining economic activity?

The stage of the business cycle characterized by declining economic activity is known as contraction, often referred to as a recession. During this phase, a variety of indicators show that the economy is slowing down. This may include a drop in consumer spending, decreased industrial production, lower levels of investment from businesses, and rising unemployment rates.

As economic activity diminishes, firms may respond by cutting back on outputs and laying off workers, leading to further declines in consumer confidence and spending. This negative feedback loop can deepen the contraction as both consumers and businesses become more cautious.

In contrast, the other stages of the business cycle, such as expansion and peak, indicate periods of growing economic activity. In an expansion phase, economic indicators like GDP typically grow, consumers spend more, and businesses invest in new projects. The peak represents the high point before a contraction begins, where the economy operates at or near full capacity. Lastly, the trough is the lowest point of the cycle, during which economic activity bottoms out before recovery begins. Understanding these distinctions is crucial for analyzing the overall health of an economy.