1. The Business Cycle and its Phases
a. describe the business cycle and its phases;
b. describe how resource use, housing sector activity, and external trade sector activity vary as an economy moves through the business cycle;
What is the business cycle?
The business cycle is the fluctuations in the general level of economic activity as measured by such variables as the rate of unemployment and changes in real GDP. Periods of growth in real output and other aggregate measures of economic activity followed by periods of decline are distinguishing characteristics of business cycles.
How do you describe the business cycle chart?
- Y-axis = Total output
- X-axis = time
What are the four characteristics of the business cycle chart?
- Peak - When most businesses are operating at capacity level and real GDP is growing rapidly
- Contraction - Aggregate business conditions are slow, real GDP grows at a slower rate or even declines, and the unemployment rate increases.
- Trough - The bottom of the contraction phase is referred to as the recessionary trough. When a contraction is prolonged and characterized by a sharp decline in economic activity, it is called a depression.
- Expansion - After the downturn reaches bottom and economic conditions begin to improve, the economy enters the expansion phase of the cycle. Here business sales rise, GDP grows rapidly, and the rate of unemployment declines.