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MATSEC SEC Economics study materials
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MATSEC SEC Economics practice questions

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Question 1Economics (SEC syllabus content)

A country's central bank raises its key interest rate. Which outcome is most consistent with standard macroeconomic theory?

  1. Borrowing becomes more expensive and investment spending tends to fall Correct answer.
  2. Commercial banks are forced to reduce their lending rates
  3. Household saving becomes less attractive and consumption rises immediately
  4. The exchange rate depreciates automatically and exports rise sharply

Explanation

A higher policy rate raises the cost of credit, so firms and households normally cut back on financed spending, especially investment. Saving becomes relatively more rewarding, not less. Exchange-rate and bank-rate effects depend on other conditions and are not automatic.

Question 2Economics (SEC syllabus content)

Which situation best illustrates the economic problem of scarcity?

  1. A shop throws away stock because nobody wanted it
  2. A government has more spending plans than the tax revenue available Correct answer.
  3. A consumer chooses between two goods that cost nothing
  4. A firm has unlimited funds and buys every input it needs

Explanation

Scarcity means wants exceed the resources available to satisfy them, forcing choices. Limited revenue against competing spending plans captures that trade-off directly. Unlimited funds or free goods remove the constraint altogether.

Question 3Economics (SEC syllabus content)

The price of a good rises from €10 to €12 and quantity demanded falls from 500 to 450 units. Using the standard formula, price elasticity of demand is approximately:

  1. 0.25
  2. 1.73
  3. 0.58 Correct answer.
  4. 4.00

Explanation

Percentage change in quantity is 50/500 = 10%; percentage change in price is 2/10 = 20%. Dividing gives 0.5, and using the mid-point method gives about 0.58. Either way demand is inelastic because the value is below one.

Question 4Economics (SEC syllabus content)

A government imposes a maximum price below the free-market equilibrium. What is the expected result?

  1. A fall in demand caused by higher effective prices
  2. Excess demand because quantity demanded exceeds quantity supplied Correct answer.
  3. A surplus because supply exceeds demand at that price
  4. No change because price controls do not affect quantities

Explanation

A binding price ceiling sits below equilibrium, so the quantity demanded at that price exceeds the quantity supplied. The shortfall appears as excess demand or a shortage. Surpluses arise from minimum prices set above equilibrium.

Question 5Economics (SEC syllabus content)

A firm's total fixed cost is €200 and total variable cost at 50 units is €300. What is average total cost at that output?

  1. €500
  2. €4
  3. €6
  4. €10 Correct answer.

Explanation

Total cost equals fixed plus variable cost, which is €500. Average total cost divides this by output: 500/50 = €10 per unit. The other figures confuse totals with averages or omit one cost component.

Question 6Economics (SEC syllabus content)

Which characteristic is typical of an oligopolistic market structure?

  1. Perfectly free entry with identical cost structures
  2. Many sellers of a homogeneous product with no strategic interaction
  3. A few large firms whose decisions are interdependent Correct answer.
  4. A single seller with no close substitutes

Explanation

Oligopoly is defined by a small number of significant sellers, so each firm must consider rivals' reactions when setting price or output. That mutual interdependence distinguishes it from monopoly and from perfect competition.

Question 7Economics (SEC syllabus content)

A country moves from autarky to free trade and becomes an importer of a product. Which effect is normally predicted?

  1. Government tariff revenue rises because imports are taxed
  2. Both consumer and producer surplus rise equally
  3. Domestic producer surplus rises because local firms gain new markets
  4. Domestic consumer surplus rises while domestic producer surplus falls Correct answer.

Explanation

Opening to imports lowers the domestic price to the world level, benefiting consumers and hurting import-competing producers. The net welfare gain arises because the consumer gain exceeds the producer loss. Tariff revenue does not arise when trade is free.

Question 8Economics (SEC syllabus content)

Which item is excluded from the calculation of a country's Gross Domestic Product?

  1. Revenue from a restaurant meal sold to tourists
  2. A payment made to a pensioner by the state Correct answer.
  3. A newly built house sold to a household
  4. Fees earned by a lawyer in private practice

Explanation

GDP counts the value of goods and services produced in a period, so transfer payments such as pensions are excluded because nothing new is produced. The house, legal services and restaurant meal are all current output.

Question 9Economics (SEC syllabus content)

The consumer price index rises from 120 to 126 over a year. What is the annual inflation rate?

  1. 126%
  2. 6.0%
  3. 4.8%
  4. 5.0% Correct answer.

Explanation

Inflation is the percentage change in the index: (126 − 120)/120 × 100 = 5%. Using the earlier index as the base is standard. The other values either use the wrong base or misread the index level as a rate.

Question 10Economics (SEC syllabus content)

A person who is available for work and actively seeking a job is temporarily between jobs while searching among suitable local vacancies. This person is classified as:

  1. Economically inactive
  2. Seasonally unemployed
  3. Frictionally unemployed Correct answer.
  4. Structurally unemployed

Explanation

Frictional unemployment covers people moving between jobs or entering the labour market who are searching and available. Here, the delay comes from finding a suitable employer despite available vacancies. Structural unemployment reflects a mismatch of skills or location, while seasonal unemployment is tied to predictable annual patterns.

Question 11Economics (SEC syllabus content)

Which policy is an example of automatic fiscal stabilisation?

  1. A central bank cutting its policy rate to boost demand
  2. A deliberate increase in public investment planned in the annual budget
  3. Progressive income tax receipts falling when incomes fall in a downturn Correct answer.
  4. A one-off stimulus package voted by parliament during a recession

Explanation

Automatic stabilisers operate without new discretionary decisions: tax receipts and welfare spending respond to the cycle by themselves. Progressive tax receipts falling in a slump cushion disposable income automatically. The other options require deliberate policy action.

Question 12Economics (SEC syllabus content)

Which function of money is illustrated when a shop displays prices in euro?

  1. Unit of account Correct answer.
  2. Standard of deferred payment
  3. Medium of exchange
  4. Store of value

Explanation

A unit of account is the common measure in which prices and values are expressed, allowing comparison between goods. Acting as a medium of exchange concerns settling transactions, and a store of value concerns holding purchasing power over time.

Question 13Economics (SEC syllabus content)

A commercial bank receives a new deposit of €1,000 and the required reserve ratio is 10%. Assuming no cash leakages, the maximum total increase in bank deposits is:

  1. €100
  2. €10,000 Correct answer.
  3. €1,000
  4. €9,000

Explanation

The deposit multiplier is 1 divided by the reserve ratio, so 1/0.10 = 10. Multiplying the initial deposit of €1,000 by 10 gives a maximum deposit expansion of €10,000. The other figures confuse the initial deposit, the multiplier or the reserves with the final total.

Question 14Economics (SEC syllabus content)

Which statement best describes the law of diminishing marginal utility?

  1. Marginal utility is always negative beyond the first unit
  2. Total utility falls as more units are consumed
  3. Consumers always prefer more variety to more quantity
  4. Each additional unit consumed adds less extra satisfaction than the previous one Correct answer.

Explanation

The law states that as consumption of a good increases within a period, the satisfaction gained from each extra unit tends to decline. Total utility can still rise while marginal utility falls, and marginal utility need not become negative.

Question 15Economics (SEC syllabus content)

A movement along a demand curve is caused by:

  1. A change in the price of a substitute good
  2. A change in the price of the good itself Correct answer.
  3. A change in consumers' incomes
  4. A successful advertising campaign for the good

Explanation

Only a change in the good's own price causes a movement along an existing demand curve, changing quantity demanded. The other factors shift the whole curve by altering demand at every price.

Question 16Economics (SEC syllabus content)

A firm in perfect competition maximises profit in the short run by producing where:

  1. Price equals average total cost
  2. Average revenue is at its maximum
  3. Marginal cost equals marginal revenue and marginal cost is rising Correct answer.
  4. Total revenue is at its maximum

Explanation

Profit is maximised where marginal revenue equals marginal cost, provided marginal cost is rising through that point. For a price taker, marginal revenue equals the market price. Equating price with average cost or maximising revenue does not generally maximise profit.

Question 17Economics (SEC syllabus content)

Which of the following is a positive economic statement?

  1. Everyone deserves a living wage
  2. An increase in the minimum wage will raise the incomes of low-paid workers Correct answer.
  3. The government ought to raise the minimum wage
  4. Inequality is unfair and must be reduced

Explanation

Positive statements are factual claims that can be tested against evidence, such as the predicted effect of a wage floor on incomes. Normative statements express value judgements about what should happen and cannot be proved or disproved by data.

Question 18Economics (SEC syllabus content)

A public good such as national defence is characterised by:

  1. Rivalry in consumption and easy exclusion of non-payers
  2. Non-rivalry and non-excludability Correct answer.
  3. Non-rivalry but easy exclusion of non-payers
  4. Rivalry but non-excludability

Explanation

Public goods are non-rival, meaning one person's use does not reduce another's, and non-excludable, meaning non-payers cannot easily be prevented from benefiting. These features cause free-riding and justify public provision. The other options describe private or club goods.

Question 19Economics (SEC syllabus content)

A negative externality of production, such as factory pollution, means that:

  1. Marginal social cost exceeds marginal private cost Correct answer.
  2. Marginal private cost exceeds marginal social cost
  3. Marginal social benefit exceeds marginal private benefit
  4. The good is always underproduced relative to the social optimum

Explanation

A negative production externality adds an external cost to private costs, so social cost exceeds private cost. Firms ignoring that cost produce more than the socially efficient level, creating a deadweight loss. Positive externalities, by contrast, make social benefit exceed private benefit.

Question 20Economics (SEC syllabus content)

A country's balance of payments current account records:

  1. Changes in the official reserves only
  2. Trade in goods and services, plus primary and secondary income flows Correct answer.
  3. Only trade in physical goods
  4. Foreign direct investment and portfolio flows

Explanation

The current account covers visible trade in goods, invisible trade in services, and income and transfer flows. Investment flows belong in the financial account, and reserve changes are also recorded there.

Question 21Economics (SEC syllabus content)

A depreciation of a country's exchange rate is most likely to:

  1. Reduce domestic inflation immediately by lowering import prices
  2. Leave trade unchanged because only domestic prices matter
  3. Make its exports cheaper abroad and imports dearer at home Correct answer.
  4. Make its exports more expensive abroad and reduce export volumes

Explanation

A weaker currency lowers the foreign-currency price of exports and raises the domestic price of imports. This can improve the trade balance if demand conditions, such as the Marshall-Lerner condition, are met. It tends to raise rather than lower import-price inflation.

Question 22Economics (SEC syllabus content)

Which combination of events would shift a country's production possibility frontier outward?

  1. A fall in the price of imported raw materials
  2. A movement of workers from manufacturing into services
  3. An improvement in technology and an increase in the labour force Correct answer.
  4. A rise in consumer demand for existing goods

Explanation

The frontier shows maximum potential output, so it shifts outward only when productive capacity grows, for example through better technology or more labour. Reallocating workers between sectors moves the economy along or inside the frontier. Demand and input-price changes do not expand capacity directly.

Question 23Economics (SEC syllabus content)

In a monopoly, compared with a perfectly competitive market with the same costs, the monopolist typically:

  1. Charges a lower price to eliminate all deadweight loss
  2. Produces the same output at the same price
  3. Produces a lower output and charges a higher price Correct answer.
  4. Produces a higher output and charges a lower price

Explanation

A monopolist restricts output below the competitive level to raise price and earn supernormal profit, creating deadweight loss. Compared with perfect competition, output is lower and price higher. Charging the competitive price would remove the monopoly's market power.

Question 24Economics (SEC syllabus content)

A government wants to reduce the consumption of a good that generates a negative externality. Which policy addresses the externality most directly?

  1. A subsidy paid to producers of the good
  2. A tax per unit equal to the marginal external cost Correct answer.
  3. A publicity campaign encouraging consumers to buy more
  4. Price controls setting a maximum price for the good

Explanation

A Pigouvian tax set equal to the marginal external cost internalises the externality, raising private cost towards social cost and reducing output to the efficient level. Subsidies and demand promotion would increase consumption, worsening the problem.

Question 25Economics (SEC syllabus content)

Which statement about the multiplier effect is correct?

  1. The multiplier applies only to changes in taxation
  2. The multiplier is larger when the marginal propensity to save is higher
  3. The multiplier equals 1 divided by the marginal propensity to save Correct answer.
  4. A larger multiplier means an initial spending change has a smaller final effect on income

Explanation

In the simple model the multiplier is 1/(1 − MPC), which equals 1/MPS. A higher propensity to save therefore gives a smaller multiplier, because less of each extra income is respent. The multiplier applies to spending injections generally, not only tax changes.

Question 26Economics (SEC syllabus content)

A consumer's income rises from €200 to €250 per week and, as a result, purchases of a particular good fall from 10 units to 8 units. What is the income elasticity of demand for this good?

  1. −0.8
  2. +1.25
  3. +0.8
  4. −1.0 Correct answer.

Explanation

Income elasticity equals the percentage change in quantity demanded divided by the percentage change in income. Quantity falls by 2/10 = 20% while income rises by 50/200 = 25%, giving −20/25 = −1.0. A negative value identifies the good as inferior.

Question 27Economics (SEC syllabus content)

Which statement describes a supply curve that is perfectly inelastic?

  1. Quantity supplied becomes infinite at a single ruling price, so the curve is horizontal
  2. Quantity supplied falls to zero at any price above the market equilibrium
  3. Quantity supplied is unchanged whatever the price, so the curve is vertical Correct answer.
  4. Quantity supplied rises by the same percentage as the price, so the curve passes through the origin

Explanation

Price elasticity of supply measures the responsiveness of quantity supplied to a price change. Perfectly inelastic supply means elasticity is zero, so the same quantity is offered at every price and the curve is a vertical line.

Question 28Economics (SEC syllabus content)

A price ceiling is set below the free-market equilibrium price for a good. Which outcome is expected in that market?

  1. No change in quantity traded, because the ceiling merely confirms the market price
  2. A surplus, because suppliers offer more than consumers wish to buy
  3. Excess demand, because quantity demanded exceeds quantity supplied at the legal price Correct answer.
  4. An immediate rise in the market price towards the ceiling level

Explanation

A binding maximum price below equilibrium makes the good cheaper than the market would set, so quantity demanded rises along the demand curve while quantity supplied falls along the supply curve. The gap between them is excess demand, often accompanied by queues or black markets.

Question 29Economics (SEC syllabus content)

Which change would cause the demand curve for bus travel to shift to the right?

  1. A reduction in the wages paid to bus drivers
  2. A rise in the fares charged by the competing railway Correct answer.
  3. An improvement in the fuel efficiency of buses
  4. A fall in the price of bus tickets

Explanation

A rise in the price of a substitute good makes bus travel relatively more attractive, so demand for bus travel increases at every fare and the curve shifts right. Changes in the good's own price only move the consumer along the existing curve.

Question 30Economics (SEC syllabus content)

A firm's total fixed cost is €500 and its total variable cost at 100 units of output is €1,500. What is the average total cost at that output?

  1. €2,000
  2. €20 Correct answer.
  3. €15
  4. €5

Explanation

Total cost is fixed cost plus variable cost, here €500 + €1,500 = €2,000. Average total cost divides total cost by output, so €2,000 ÷ 100 = €20 per unit.

Question 31Economics (SEC syllabus content)

In the short run, a firm should continue producing even if it is making a loss, provided that:

  1. price covers average variable cost Correct answer.
  2. total revenue exceeds total fixed cost
  3. marginal cost is falling
  4. price exceeds average total cost

Explanation

Fixed costs must be paid whether or not the firm produces. If revenue covers variable costs, the firm recovers all of them plus part of its fixed costs, which is better than shutting down and losing the whole fixed cost.

Question 32Economics (SEC syllabus content)

Which feature distinguishes monopolistic competition from perfect competition?

  1. Firms face a downward-sloping demand curve because their products are differentiated Correct answer.
  2. Firms produce a homogeneous product sold at a single market price
  3. There are only a few large firms in the industry
  4. There are significant barriers preventing new firms from entering

Explanation

In monopolistic competition many firms sell products that are similar but differentiated by brand, quality or location. This differentiation gives each firm some price-setting power, so its demand curve slopes downwards rather than being horizontal.

Question 33Economics (SEC syllabus content)

Why does a kinked demand curve model predict price stability in an oligopoly?

  1. Firms in an oligopoly are unable to calculate their marginal costs
  2. Rivals always match a price cut but ignore a price rise, so revenue falls for any price change Correct answer.
  3. The government fixes the price at the kink to prevent competition
  4. Consumers are indifferent to price changes when products are branded

Explanation

The kinked demand curve assumes asymmetric reactions: a price rise is not followed by rivals, so the firm loses many customers, while a price cut is matched, so it gains few. Marginal revenue is discontinuous at the kink, so small cost changes leave the profit-maximising price unchanged.

Question 34Economics (SEC syllabus content)

Market failure occurs when:

  1. total output in an economy falls during a recession
  2. the free market allocates resources in a way that does not maximise social welfare Correct answer.
  3. one firm grows large enough to employ a majority of the local workforce
  4. a market clears at a price where quantity demanded equals quantity supplied

Explanation

Market failure is a situation where the price mechanism allocates resources inefficiently, so that marginal social benefit differs from marginal social cost. Externalities, public goods, information gaps and market power are common causes.

Question 35Economics (SEC syllabus content)

A subsidy is paid to producers of a good that generates a positive externality in consumption. What is the intended effect?

  1. To shift the supply curve to the left, reducing output
  2. To raise the market price so that consumers buy less of the good
  3. To collect revenue that compensates those harmed by the good
  4. To lower the market price and raise the quantity consumed towards the socially optimal level Correct answer.

Explanation

A positive externality in consumption means marginal social benefit exceeds marginal private benefit, so the free market underproduces the good. A subsidy lowers producers' costs, shifting supply right, which reduces price and expands consumption towards the social optimum.

Question 36Economics (SEC syllabus content)

Which of the following is an example of expansionary monetary policy?

  1. The government reduces spending on public infrastructure
  2. The central bank purchases government securities in the open market Correct answer.
  3. The government increases income tax rates
  4. The central bank raises the required reserve ratio

Explanation

Open market purchases by the central bank inject reserves into the banking system, supporting credit creation and lowering interest rates. This raises aggregate demand and is therefore expansionary monetary policy.

Question 37Economics (SEC syllabus content)

What is the effect of an increase in the required reserve ratio on a commercial bank's ability to create credit?

  1. Its lending capacity is unaffected because reserves earn interest
  2. Its lending capacity falls because a larger share of deposits must be held as reserves Correct answer.
  3. Its lending capacity rises only if the central bank also lowers the discount rate
  4. Its lending capacity rises because more reserves are available for loans

Explanation

A higher reserve ratio means each euro of deposits supports fewer loans, reducing the credit multiplier. The bank must hold a larger proportion of deposits in reserve, so the volume of new lending that can be supported by any given deposit falls.

Question 38Economics (SEC syllabus content)

A government increases spending on a new motorway project by €40 million. If the marginal propensity to consume is 0.75, what is the maximum total increase in national income, assuming spare capacity and no crowding out?

  1. €40 million
  2. €53.3 million
  3. €160 million Correct answer.
  4. €120 million

Explanation

The multiplier equals 1 divided by (1 − marginal propensity to consume), here 1 ÷ 0.25 = 4. Multiplying the initial injection of €40 million by 4 gives a maximum total increase in national income of €160 million.

Question 39Economics (SEC syllabus content)

Which item is included in the labour force of a country?

  1. A full-time student who is not looking for work
  2. A retired person who no longer wishes to work
  3. An unpaid family carer who is not seeking employment
  4. A part-time worker who is actively looking for additional hours Correct answer.

Explanation

The labour force comprises people in employment plus those unemployed and actively seeking work. A part-time worker counts as employed, so this person is inside the labour force even while searching for more hours.

Question 40Economics (SEC syllabus content)

Which type of unemployment is most likely to rise when an economy enters a deep recession and demand for goods falls?

  1. Frictional unemployment
  2. Cyclical unemployment Correct answer.
  3. Seasonal unemployment
  4. Structural unemployment

Explanation

Cyclical unemployment is caused by a shortfall in aggregate demand during a downturn. As firms sell less, they reduce their workforces, and the resulting joblessness is tied to the business cycle.

Question 41Economics (SEC syllabus content)

Which group of people is most likely to lose purchasing power during a period of unexpectedly high inflation?

  1. Borrowers repaying a fixed-rate mortgage
  2. Savers holding money in accounts paying a fixed nominal interest rate Correct answer.
  3. Holders of physical assets such as property
  4. Workers whose wages are fully indexed to the consumer price index

Explanation

If the nominal interest rate is fixed and inflation accelerates, the real interest rate falls, possibly becoming negative. Savers therefore find that the real value of their balances and interest is eroded.

Question 42Economics (SEC syllabus content)

A country's gross domestic product at market prices is €50 billion and its population is 2 million. What is GDP per capita?

  1. €250,000
  2. €100,000
  3. €25,000 Correct answer.
  4. €2,500

Explanation

GDP per capita divides total output by the number of people, so €50 billion ÷ 2 million = €25,000 per person. It is a common though imperfect indicator of average living standards.

Question 43Economics (SEC syllabus content)

Which transaction is recorded as a credit in a country's balance of payments?

  1. A foreign tourist spending money in the country's hotels Correct answer.
  2. A resident firm importing machinery from abroad
  3. A resident firm investing in a factory in another country
  4. A resident sending a gift of money to relatives overseas

Explanation

The balance of payments uses double entry, and a credit records an inflow of foreign currency. Spending by foreign tourists is an export of services, bringing money into the country.

Question 44Economics (SEC syllabus content)

Which argument is most commonly used to justify protecting a young domestic industry with a tariff?

  1. The tariff raises revenue that can be used to subsidise exports
  2. The tariff increases the variety of imported goods available
  3. The industry cannot yet achieve the scale needed to compete with established foreign producers Correct answer.
  4. The tariff guarantees that domestic consumers pay lower prices

Explanation

The infant industry argument holds that new domestic industries may lack the scale and experience to compete with mature foreign rivals. Temporary protection is claimed to allow them to grow until they can compete unaided.

Question 45Economics (SEC syllabus content)

A tax is placed on a good whose demand is highly inelastic and whose supply is relatively elastic. Who bears the larger share of the tax burden?

  1. Consumers, because they cannot easily reduce their purchases Correct answer.
  2. Producers, because they are legally required to pay the tax to the government
  3. The government, because it sets the tax rate
  4. The burden is shared equally regardless of elasticity

Explanation

The incidence of a tax depends on the relative elasticities of demand and supply. When demand is highly inelastic, consumers cannot switch away easily, so the price rises by close to the full amount of the tax and they bear most of the burden.

Question 46Economics (SEC syllabus content)

Which of the following is a merit good that governments often provide free of charge?

  1. State-funded primary education Correct answer.
  2. A private gym membership
  3. Bottled mineral water
  4. Cigarettes

Explanation

A merit good is one whose social benefit exceeds the private benefit perceived by consumers, often because of information failure. State-funded primary education is a standard example, since society gains from an educated population and consumption is encouraged by free provision.

Question 47Economics (SEC syllabus content)

A government reduces the rate of income tax on low earners while leaving the tax rate on high earners unchanged. Which effect on the distribution of income is most likely?

  1. The distribution becomes more equal, because total tax revenue necessarily rises
  2. There is no effect on distribution, because only tax rates changed
  3. The distribution becomes less equal, because low earners keep more of their income
  4. The distribution becomes more equal, because the tax system becomes more progressive Correct answer.

Explanation

Progressive taxation takes a larger proportion of income from higher earners. Cutting tax on low earners while leaving higher rates unchanged increases the progressivity of the system and tends to narrow post-tax income differences.

Question 48Economics (SEC syllabus content)

Which combination of policies would most clearly reduce a government's budget deficit?

  1. Raising tax rates and cutting public spending Correct answer.
  2. Lowering tax rates and cutting public spending
  3. Lowering tax rates and increasing public spending
  4. Raising tax rates and increasing public spending

Explanation

A budget deficit is the excess of government spending over revenue. Raising taxes increases revenue while cutting spending reduces outlays, so both changes work in the same direction to shrink the deficit.

Question 49Economics (SEC syllabus content)

A country's central bank raises its key interest rate sharply. Which chain of effects is most consistent with macroeconomic theory?

  1. Investment falls, aggregate demand falls and downward pressure is placed on inflation Correct answer.
  2. Government spending automatically falls, reducing the budget deficit
  3. Exports rise immediately, causing the trade balance to improve
  4. Borrowing becomes cheaper, consumption rises and the exchange rate depreciates

Explanation

Higher interest rates raise the cost of borrowing, so firms invest less and households spend less on credit. Lower aggregate demand reduces inflationary pressure, which is why tight monetary policy is used to control inflation.

Question 50Economics (SEC syllabus content)

Which statement about the economic cycle is correct?

  1. A boom is characterised by rising unemployment and falling prices
  2. Recovery follows immediately after the peak without any downturn
  3. The trough of a cycle is the point of highest output
  4. A recession is usually associated with falling output and rising unemployment Correct answer.

Explanation

During a recession, aggregate demand falls, firms produce less and labour demand declines, so unemployment tends to rise. This phase follows the peak and precedes the trough in the standard cycle.