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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.

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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.