Phases of the Business Cycle Flashcards
Economic activity begins to decline, GDP decreases
Contraction
Faced with unwanted inventories and declining profits, firms reduce production, postpone investment, curtail hiring, and may lay off employees
Contraction
Business failures outnumber start-ups
Contraction
Falling employment erodes household income and consumer confidence
Contraction
Consumers react by spending less and saving more, which further cuts into sales
Contraction
Stock market activity is low
Contraction
Inflation, and therefore the rise in prices of goods and services, is stable.
Expansion
Businesses adjust inventories and invest in new capacity to meet increased demand and avoid shortages
Expansion
Corporate profits rise
Expansion
New business start-ups outnumber bankruptcies
Expansion
Stock market activity is strong and the markets typically rise
Expansion
Job creation is steady and the unemployment rate is steady or falling
Expansion
Demand begins to outstrip the capacity of the economy to supply it
Peak
Labour and product shortages cause wage and price increases, and inflation rises accordingly
Peak
Interest rates rise and bond prices fall, which dampens business investment and reduces sales of houses and other big-ticket consumer goods.
Peak
Business sales decline, resulting in accumulation of unwanted inventory and reduced profits
Peak
Stock prices generally begin to fall along with falling profits, and stock market activity declines
Peak
Interest rates fall, triggering a bond rally
Trough
Inflation falls
Trough
Consumers who postponed purchases during the contraction are spurred by lower interest rates and begin to spend.
Trough
Stock Prices Rally
Trough
Firms that reduced inventories during the contraction must increase production to meet new demand.
Recovery
Firms are typically still too cautious to hire back significant number of workers, but the period of widespread layoffs is over.
Recovery
Firms are not yet ready to make significant new investment.
Recovery
Unemployment remains high, wage pressures are restrained, and inflation may decline further.
Recovery
