The Business Cycle  Definition: alternating increases and decreases in the level of economic activity, sometimes extending over several years

Business Cycles in the U.S. Recessions last about 14 months historically

Phases of the Cycle  Peak:  The top of the cycle where Real GDP is at a maximum  Unemployment is low  Inflation may be high  Contraction:  Real GDP is falling for two consecutive quarters  Unemployment rate is increasing  Inflation falls, might have deflation

Phases of the Cycle  Trough:  The bottom of the Cycle where a contraction has stopped  Unemployment is very high  Zero to negative inflation (deflation)  Expansion:  A period where real GDP is growing and returning to Full Employment  Unemployment is decreasing  Inflation is increasing

You should know…  The secular trend  The Quarter system  A contraction or recession is a decline in real GDP that lasts at least 6 months (2 quarters) Expansions are associated with an assumption of increased inflation Recessions are associated with an assumption of increased unemployment

2 more things  STAGFLATION- Increasing inflation in the absence of economic growth  MISERY INDEX- The unemployment rate and the inflation rate added together