Business Cycle Phases to Know for AP Macroeconomics

Understanding the business cycle phases is crucial in economics. These phases—expansion, peak, contraction, trough, and recovery—show how economies grow and shrink, impacting GDP, unemployment, and consumer confidence. This knowledge helps analyze economic trends and make informed decisions.

1. Expansion

   • Characterized by increasing economic activity, rising GDP, and lower unemployment rates.
   • Consumer confidence typically rises, leading to increased spending and investment.
   • Businesses expand production and hire more workers, contributing to wage growth.
   • Inflation may begin to rise as demand for goods and services increases.

2. Peak

   • The highest point of economic activity in the business cycle before a downturn.
   • Economic indicators such as GDP growth rate and employment levels are at their maximum.
   • Inflation may reach its highest levels, prompting potential intervention by central banks.
   • Unsustainable growth may lead to asset bubbles, increasing the risk of a contraction.

3. Contraction (Recession)

   • A period of declining economic activity, typically defined as two consecutive quarters of negative GDP growth.
   • Unemployment rates rise as businesses cut back on production and lay off workers.
   • Consumer spending decreases, leading to lower demand for goods and services.
   • Business investment declines, and confidence in the economy wanes.

4. Trough

   • The lowest point of the business cycle, where economic activity is at its weakest.
   • GDP growth is negative, and unemployment is at its highest level.
   • Consumer and business confidence is low, leading to reduced spending and investment.
   • This phase sets the stage for recovery as the economy begins to stabilize.

5. Recovery

   • A phase where economic activity starts to increase after the trough, leading to rising GDP.
   • Unemployment begins to decrease as businesses start hiring again and production ramps up.
   • Consumer confidence gradually improves, resulting in increased spending and investment.
   • Inflation may remain low initially, but can rise as demand picks up and the economy strengthens.