Business Cycle – Part 1

Vocabulary flashcards covering the key phases, concepts, and features of the business cycle introduced in Chapter 5, Part 1.

Business Cycle

A recurring pattern of economic expansion, peak, contraction, trough, and recovery experienced by an economy.

Expansion (Prosperity)

Phase in which national output, employment, aggregate demand, consumer and capital expenditure, sales, profits, bank credit, and stock prices all rise while involuntary unemployment is virtually zero.

Peak

The highest point of the business cycle where input supply falls short of input demand, prices and cost of living rise, and actual demand begins to stagnate—marking the end of expansion.

Contraction (Recession)

Phase that follows a peak; growth halts, inventories accumulate, producers cut investment, incomes fall, prices are lowered to dispose of goods, and economic decline spreads across sectors.

Trough

The lowest point of economic activity where output, income, and employment bottom out before recovery begins; also called the turning point from contraction to expansion.

Depression

A prolonged and severe form of recession characterized by negative growth, very low disposable income, falling interest rates, weak credit demand, widespread bankruptcies, and liquidation (e.g., 1929 crisis).

Aggregate Demand (AD)

The total demand for goods and services in an economy at a given overall price level and period, rising in expansion and falling in contraction.

Involuntary Unemployment

Joblessness not by choice but due to insufficient demand for labor; essentially zero during expansion.

Frictional Unemployment

Short-term unemployment arising from normal labor-market turnover such as people changing jobs or entering the workforce.

Structural Unemployment

Long-term unemployment caused by mismatches between workers’ skills and job requirements or geographic location.

Inventory Accumulation

A build-up of unsold goods during the early stages of contraction when producers overestimate future demand.

Business Confidence

Producers’ and investors’ expectations about future economic conditions; falls during contraction and rises in recovery, spurring new investment.

Negative Growth Rate

A decline in real output, typical of depression when economic activity contracts year-over-year.

Liquidity Preference in Depression

Households’ increased desire to hold cash or liquid assets due to low confidence and falling interest rates.

Bankruptcies and Liquidation

Frequent failures of firms and forced selling of assets during depression as credit tightens and demand collapses.

Recovery

Phase following a trough marked by renewed optimism, lower labor costs, rising business confidence, and