Economic Cycle

Question 1

Expansion

Answer 1

Strong demand for goods and services
Growth in business sales and profits
Demand starts to overtake supply
Prices (inflation) starts to rise
Economy starts to overheat
Interest rates rise to dampen demand and slow expansion

Question 2

Boom

Answer 2

Highest point in the cycle
Economy growing at its fastest
Interest rates increased further
Debt repayments more expensive
Demand begins to fall

Question 3

Contraction

Answer 3

Inflation may still be high at the beginning of contraction
Demand is falling further
Business sales and profits begin to fall
Unemployment begins to rise
Inflation begins to fall (disinflation)
Interest rates start to fall to encourage spending

Question 4

Recession

Answer 4

Sever economic slowdown
Business profits are weak
People aren’t spending as much (lack of confidence)
Inflation falls further (disinflation)
Interest rates fall further to stimulate the economy
Severe enough, it is known as a Depression

Question 5

Recovery

Answer 5

Return to phase one
Inflation and interest rates remain low
Consumer confidence begins to grow
People begin spending again
Demand starts to rise
Business sales and profits begin to rise
The cycle resumes again