Unit 12: The Business Cycle

Business Cycles go through four stages, or phases: (4)

1. Expansion 2. Peak 3. Contraction 4. Trough

Some economists break the expansion phase into two separate phases: recovery and expansion (creating a five-phase cycle)

1. Recovery is the period of growth from the trough to the prior peak. 2. Expansion is when the economy reaches the prior peak and continues to grow.

Trough is characterized by: (4)

1. high unemployment 2. flat GDP 3. low inflation 4. low, but not decreasing, consumer demand.

Expansion ins the business cycle tends to be characterized by: (5)

1. increased consumer demand for goods and services 2. increases in industrial production 3. rising stock prices 4. rising property values 5. increasing GDP

Contraction (downturns) are characterized by: (5)

1. rising numbers of bankruptcies and bond defaults 2. higher consumer debt 3. falling stock prices 4. rising inventories (a sign of slackening consumer demand in hard times) 5. decreasing GDP

Peak or Prosperity is characterized by: (4)

1. very low unemployment 2. a slowdown in inflation 3. a slowing of GDP 4. steady consumer demand

Associate inflation with expansion

In normal economic cycles, we tend to see inflation be very low, or even deflation, when the economy is contracting. As the economy recovers, inflation increases but generally stays mild. A more serious inflation period is more common during the expansion phase of the economy. During an expansion, most of the existing productive capacity is already in use (all of the workers are working and all the factories are producing). As demand increases, the production side has trouble increasing to meet the demand, and prices tend to rise.

Depression

if a contraction continues for 18 months, it is now called a depression. This sort of severe downturn is thankfully rare.

Business Cycle

the economy fluctuates between growth and contraction in a regular cycle. This is part of providing good advice and recommendations to customers.

Recession

when the economy enters an extended period of contraction that continues for six months or longer. May be mild (early 1990s) or severe (as in the Great Recession of 2008)