Question

What are the 4 phases of the business cycle? How long does a business cycle last? What causes each phase

Answer 1

Each business cycle has four phases. They are expansion, peak, contraction, and trough

The duration of the business cycle is a period of time with a single boom and a contraction in sequence. The time it takes to complete this sequence is referred to as the duration of the business cycle. There's an expansion between the trough and the peak. This is when the economy is growing. The gross domestic product, which measures economic production, is increasing. GDP growth rate is in the stable range of 2 to 3 percent. Unemployment hits its normal rate from 3.5 percent to 4.5 percent. Inflation is close to its 2 % target. The stock market is on the bull market. A well-managed economy will stay in the growth process for years to come. It's called the Goldilocks market.The expansion process is approaching its end as the economy is overheating. That's when the GDP growth rate is more than 3%. Inflation is greater than 2% and may reach double digits. Investors are in a "irrational exuberance" state. That's when they create asset bubbles.

The second stage is the peak. It's the month of the expansion transition to the contraction phase.

The third stage is a contraction. It starts at the top and ends at the trough. Economic growth is slowing. GDP growth falls below 2%. That's what economists call a recession when it turns negative. Mass layoffs are making headline news. The unemployment rate is beginning to rise. It doesn't happen until the end of the contraction process, because it's a lagging indicator. Businesses are reluctant to recruit new employees until they are confident that the crisis is over. Stocks enter the bear market as investors sell.

The trough is in the fourth phase. May is the month that the economy moves from the recession period to the growth phase. It's when the economy hits the bottom of it.

The economy of each nation fluctuates between periods of expansion and contraction. These changes are caused by the level of employment, productivity and overall demand for and supply of goods and services to the country. Throughout the near term, these developments have led to cycles of growth and recession. But economic growth will occur in the long run, allowing a nation to increase its potential production over time.