Economics Micro & Macro (CliffsAP)

The Business Cycle

The business cycle is a four-phase normal fluctuation of a market economy. Whether we are examining a single firm,
a particular industry, or the whole economy, market fluctuations are present at all levels:

1. Expansion:This phase of the business cycle denotes growth in the economy. In this phase, businesses, employ-
   ment, and price level is growing.


2. Peak:The peak is the height of the expansion phase. This phase is usually not known until after it is over.
   Unemployment reaches its lowest point in the cycle and businesses reach their expansion limits.


3. Contraction:This is the downside of the expansion phase. In this phase, unemployment begins to grow while
   businesses are downsizing and making cuts. Two consecutive quarters of this phase denotes a recession.


4. Trough:The trough is the “bottoming out” of the contraction phase. Again, this phase is usually not known until
   after it has passed. Unemployment and firm contraction reach their lowest points in the cycle in this phase.

Figure 3-2 shows a typical business cycle. Notice how the severity of the fluctuations can vary depending on economic
variables. One trough may not be as bad as another trough. The business cycle allows us to see the overall fluctuations
of the economy over a sustained period of time.

Figure 3-2

Injections and Leakages

Leakagesand injectionsof the monetary flow cause fluctuations of the business cycle. Anytime a household decides not
to use its income for consumption, we have a leakage. When a household decides to save rather than spend, it has created a
leakage in GDP—that is, the monetary flow is not benefiting output or GDP. Taxes and imports are also leakages because
the monetary flow for these categories is not directly benefiting GDP. An injection occurs when the government, busi-
nesses, or foreign firms spend money on U.S. goods or services. They are called injections because the money is being
spent on U.S. goods and services, which in turn help GDP growth.

Economic Growth In

The Last 50 Years

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Part II: Macroeconomics