1. Business Cycles
12-2

2. What is a business cycle??
A period of macroeconomic expansion followed by a period of macroeconomic contraction.
Involve major changes in GDP, not minor ups and downs.

3. Phase I
Expansion: period of economic growth as measured by an increase in GDP.
Economy enjoys:
Low unemployment rate
Business prosperity

4. Phase II
Peak: Real GDP stops rising and economy is at the peak of economic expansion.

5. Phase III Contraction: economic decline marked by a fall in GDP.
Unemployment tends to rise
Supply must drop to meet lowering demand.

6. Phase IV Trough: economy has “bottomed out”
Varied levels of severity during contraction and trough stage: recession, depression, and stagflation

7. Recession Prolonged economic contraction.
Unemployment generally rises 6 to 10%
Officially a recession when real GDP falls for two consecutive quarters(six straight months)

8. Depression A long and severe recession.
High unemployment and low factory output.

9. Stagflation
Decline in real GDP combined with a rise in the price level.