101 Concepts for the Level I Exam

Concept 24: Business Cycle

Business cycles refer to the fluctuation in economic activity where the real GDP and unemployment vary through time. The four stages of the business cycle are: expansion, peak, contraction and trough.

Business cycle characteristics

Trough:

GDP growth rate changes from negative to positive.
High unemployment rate and a moderate or declining inflation.
Increasing production to meet the pickup in sales with more flexible methods like overtime or increasing utilization levels.
Housing activity starts to pick up coupled with an increase in consumer spending.

Expansion:

GDP growth rate increases.
Reduction in unemployment rate as hiring rises.
Inflation may begin to rise.
Increasing production needs are met with investments and labor force additions.
Housing demand leads to a rise in construction activity.
Import increases as the domestic GDP increases.

Peak:

GDP growth rate decreases.
Unemployment rate decreases but firms cut back on hiring.
Business and consumer confidence declines, slowing the growth rates in investments and consumer spending.
Inflation rate increases.

Contraction (Recession):

GDP growth rate is declining.
Unemployment rate increases as firms cut back on production.
Inflation decreases with a lag.
Decline in consumer and business confidence lowers the investment and consumer spending.
Housing activity starts to decline.
Import decreases as the domestic GDP decreases.