PHASES AND INFLUENCES ON THE BUSINESS CYCLE

CHAPTER 10 , SECTION 2

BUSINESS CYCLES

BUSINESS CYCLES

Business cycles are fluctuations, or changes, in a market system’s economic activity.

These fluctuations are measured by increases or decreases in real GDP.

PHASES OF THE BUSINESS CYCLE

Expansion and Recovery

Peak

Contraction or Recession

Trough

EXPANSION

A period of economic expansion and growth

PEAK

A high point at which the economy is at it’s strongest and most prosperous.

At a peak, high consumer demand encourages producers to use plant capacity and more fully to hire workers.

CONTRACTION

When real GDP stops increasing, the business cycle enters a period of business slowdown known as a contraction or a recession.

A recession is a decline in real GDP for two or more consecutive quarters (6 months or more)

DEPRESSION

Prolonged and severe recessions such as the Great Depression of the 1930’s

The Great Depression was the most severe contraction in US economic history.

TROUGH

The final stage in the business cycle

Occurs when demand, production, and employment reach their lowest levels.

Following the trough, the economy enters a period of recovery and the expansion phase begins once again.