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Expansion
0%
Contraction
Recovery
a
b
o Upswing phase
v
e
Recession Phase
Equilibrium
Inflection point
Inflection point
Inflection point
b Revival
e
l Depression phase
o
w
Expansions Or Boom
Expansions are periods of increasing Real
GDP.
Unemployment decreases, businesses
expand, and Personal Consumption
increases.
As expansions continue, there tend to be
upward pressures on prices (inflation) and
interest rates.
Peak Or Recession
A peak is a period when the economy starts
to level off.
Businesses postpone new investments, and
consumer saving tends to increase.
Rising prices and interest rates tend to
restrict purchases and investments, often
leading to a Contraction.
Contraction Or Depression
A Contraction is a period of declining Real
GDP.
Consumer spending decreases, and
unemployment increases as businesses layoff
workers and shorten work hours.
Interest rates and prices level off, and often
decline during long contractions.
Long Term Contractions
Recession:
Six months of declining Real GDP
Depression:
Twelve months of declining Real GDP
coupled with at least 15%
unemployment.
Trough Or Recovery Or
Lower Turning Point
A Trough is the bottom of a Contraction.
Lower interest rates and prices bring
customers back to markets.
Things That Affect the Business Cycle
Business Investment: High levels of business
investment (capital good increases like
machinery and equipment) promote
expansion. Low levels of business investment
contribute to contraction.
Money and credit: When interest rates go up,
people borrow less, and this less money is
circulating in the economy, thus contributing to
a contraction.
Things That Affect the Business Cycle