Business cycle

Business cycle Definition

Fluctuations in the growth of real output, characterised by alternating phases of expansion (rising real output) and contraction (falling real output).

Economic theory

• key concept in macroeconomics, illustrating the natural rise and fall of economic growth over time

• Phases: Expanision, boom, contraction, trough, recession, recovery,

Expansion

• Characterized by increasing consumer confidence, higher levels of investment, and rising employment.

• Aggregate demand (AD) increases, leading to higher real GDP.

• Inflationary pressures may begin to build as demand outstrips supply.

Peak

• The economy reaches its maximum output, and growth begins to slow.

• Capacity constraints and inflationary pressures are at their highest.

Contraction

• Economic activity begins to decline, marked by falling
  consumer confidence and reduced investment.

• Unemployment rises as firms cut back on production.

• AD decreases, leading to a fall in real GDP.

Recession

• 6 months of negative economic growth

• Increase of unemployment, spare production, capacity

• Low inflation

• Low confidence

Trough:

• The economy hits its lowest point, and economic activity begins to stabilize.

• This phase sets the stage for recovery and the next expansion.