Reading the Business Cycle

Real GDP is at its highest point of the business cycle. Real output in the economy is decreasing, and the unemployment rate is rising. As the contraction continues, inflationary pressures subside. If the recession continues long enough, prices may actually start to fall, a situation known as deflation. The lowest point of real GDP reached during the business cycle is known as the trough. If the trough is particularly deep, it may be called a depression. A depression is an economic situation where the level of output falls to especially low levels and unemployment climbs to very high levels relative to the historical average. Peak Contractionary Expansionary Real GDP is at its highest point of the business cycle. Expansionary Long-run trend of real GDP Real output in the economy is increasing and the unemployment rate is declining. As the economic expansion continues, inflation may begin to accelerate. Trough

Long-run trend of real GDP - Inflation - Interest rates are high - Low unemployment 4% Peak Contractionary Expansionary Expansionary Long-run trend of real GDP Trough A recession occurs when real GDP falls for two consecutive quarters. - Deflation - Interest rates are low - High unemployment +6%

Contraction/Expansion of the Business Cycle Drop in business spending High unemployment (6 - 10% in recession) Interest rates go from high to low Consumer confidence Saving for a rainy day Deflation may occur Expansion Business investments increase Interest rates go from low to high Consumer confidence increases Low unemployment Inflation may rise