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 maximumUnemployment is lowInflation may be high

Contraction: Real GDP is falling for two consecutive

quartersUnemployment rate is increasingInflation 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