[7.2] Business Cycles

What is a business cycle?

A period of economic expansion followed by a period of contraction, marked by major changes in GDP above or below normal levels.

What are the four phases of a business cycle?

Expansion, peak, contraction, and trough.

What defines an economic expansion in a business cycle?

A period of economic growth as measured by a rise in real GDP.

How is the peak of a business cycle defined?

The height of an economic expansion, reached when real GDP stops rising.

What is a contraction in a business cycle?

A period of economic slowdown following a peak, marked by falling real GDP.

What is a trough in a business cycle?

The lowest point of a contraction, reached when real GDP stops falling.

How long must an economic contraction last to be classified as a recession?

At least $6\text{ months}$.

How is an economic depression defined?

A long and severe recession.

What are the four main economic variables that drive business cycles?

Business investment (why businesses make investments), the cost of credit and interest rates, consumer and business expectations, and external shocks.

How does an increase in business investment typically influence GDP?

Increased business investment leads to greater output and jobs, which helps increase GDP and expand the economy.