Reading the Business Cycle S Real output in

Reading the Business Cycle S

Real output in the economy The lowest point of real is decreasing, and the GDP reached during the unemployment rate is rising. business cycle is known As the contraction as the trough. If the trough Peak continues, inflationary is particularly deep, it may pressures subside. If the Contractionary be called a depression. A recession continues long depression is an economic Expansionary enough, prices may actually situation where the level of DP start to fall, a situation G l output falls to especially Expansionary Real GDP is at fits rea highest known as deflation. o low levels and d business n point of the e unemployment to in the economy is trclimbs Real output n u cycle. r very highnlevels relative to Trough g increasing and the Lo the historical average. unemployment rate is declining. As the economic expansion continues, inflation may begin to accelerate.

- Inflation - Interest rates are high - Low unemployment 4% Peak Expansionary l a e fr G Contractionar y DP o d n Lo ng re t n u r - A recession occurs when real GDP falls for two consecutive quarters. Expansionary Trough - Deflation - Interest rates are low - High unemployment +6%

Contraction/Expansion of the Business Cycle Expansion Contraction S Business investments increase S Drop in business spending S Interest rates go from low to high S High unemployment (6 - 10% in recession) S Consumer confidence increases S Low unemployment S Inflation may rise S Interest rates go from high to low S Consumer confidence S Saving for a rainy day S Deflation may occur