Certified Financial Planner (CFP) Practice Exam 2025 – All-in-One Study Guide for Exam Success!

The economic scenario characterized by a decline in real GDP for two or more successive quarters is known as a recession. A recession is officially recognized when there are two consecutive quarters of negative growth in a country's gross domestic product (GDP). This decline indicates that there is a reduction in economic activity, which typically results in decreased consumer spending, investment, and employment levels.

During a recession, businesses may experience lower sales, which can lead to layoffs and further decreases in consumer spending, creating a cycle of economic contraction. This indicator is crucial for policymakers, businesses, and investors as it helps them assess the health of the economy and make informed decisions regarding fiscal and monetary policies, as well as strategic business planning.

In contrast, a trough marks the lowest point of economic activity before a recovery begins, while a peak refers to the highest point before the economy begins to decline. Recovery is the phase following a recession, where the economy starts to grow again. Understanding these terms in relation to economic cycles is essential for analyzing economic trends and making strategic financial decisions.