What economic situation is characterized by a decline in GDP for three consecutive quarters?

The correct identification of a decline in GDP for three consecutive quarters as a recession is accurate due to the commonly accepted definition of economic downturns. A recession is typically recognized when there are two consecutive quarters of negative economic growth, but the standard extension to three consecutive quarters solidifies its characterization. During a recession, economic activity contracts, leading to increased unemployment, reduced consumer spending, and declines in business investment.

This prolonged downturn indicates sustained weakness in the economy, which is distinct from other economic phases. For instance, while depression represents a more severe and prolonged downturn typically characterized by a drastic decline in economic activity, recession is often viewed as a less severe and more common phase.

Stagflation, on the other hand, refers to a situation where stagnant economic growth coincides with high inflation and unemployment, which is not strictly a decline in GDP. Inflation, in contrast, is characterized by rising prices and does not involve declines in GDP; it reflects an increase in overall price levels in the economy. Thus, understanding these definitions helps clarify why identifying three consecutive quarters of declining GDP aligns with the definition of a recession.