The Business Cycle

How each phase affects the lives of American Citizens

What is the Business Cycle?

The term "business cycle" refers to economy-wide fluctuations in production, trade, and general economic activity.

The Four Phases of the Business Cycle

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During the expansion phase of the business cycle, there is a development in economic growth, increasing employment, and an upward pressure on prices. Economic expansions are usually marked by an upturn in production and utilization of resources. Expansion may be caused by weather conditions, technical change, fiscal policies, interest rates, regulatory policies, or other impacts on producer incentives. How does expansion affect the lives of American citizens? Well, during an expansion period, it will be easier to get employed, and companies will enlarge their companies, meaning there are more available jobs.


In the business cycle, the "Peak" is the highest point between the end of an economic expansion and the start of a contraction. The peak of the cycle refers to the last month before several key economic indicators, such as employment rates and new housing levels, start to fall. Demand is high, producers expand businesses to take advantage of marketplace opportunities. There are high levels of output and trade. CPI, GDP, and per capita GDP are high, and there is a lot of credit available to consumers. During the peak phase of the business cycle, American employment rates are at or above full employment, the economy is producing its maximum allowable output, and inflationary pressures on prices are apparent.


Contraction's are the phase of the business cycle that follows the peak. In this phase, the economy as a whole is in decline. According to most economists, a contraction is said to occur when a country's real GDP has declined for two or more consecutive quarters. When the economy hits the contraction phase of the business cycle, economic hardship starts to occur. Consumers will begin to buy basic low priced products, employment declines (unemployment increases), and producers slow down production. Trade decreases. Investment plans get cancelled. CPI, GDP, and per capita GDP decrease. Banks make it harder to get loans by decreasing credit rates. Contractions can last for many years, such as the Great Depression. During the contraction of 2008, my mother lost her job, and it was very hard for her to pay the bills and maintain our families previous lifestyle.


A trough is the lowest point in the business cycle. A trough is an even further decrease in employment and producers will create less goods and services than before in the contraction phase. Trade is low, CPI, GDP, and per capita GDP are at their lowest points. and Banks will continue to lower credit rates. After the trough/depression hits, the only way out of a trough, is to go up. Troughs mark the beginning of future expansion phases and peaks. My grandmother used to tell me stories about the Great Depression in rural NC, and she would tell me about how she lost her job, her savings, her transportation, and her ability to put food on the table for her family. The depression was a hard time for everyone, but she managed to persevere and make it through the other side.