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The economic cycle
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Economies do not grow smoothly. They move through ups and downs called the economic (business) cycle.
The four phases
Boom: fast growth, high spending, low unemployment, rising inflation.
Downturn: growth slows; spending and confidence fall.
Recession: output falls (often defined as two quarters in a row of negative growth); unemployment rises; inflation falls.
Recovery: output starts to rise again; unemployment begins to fall.
Downturn: growth slows; spending and confidence fall.
Recession: output falls (often defined as two quarters in a row of negative growth); unemployment rises; inflation falls.
Recovery: output starts to rise again; unemployment begins to fall.
How the phases affect objectives
Why it matters
Firms selling luxuries do well in a boom and badly in a recession.
Governments try to smooth the cycle, using fiscal and monetary policy, to avoid both high inflation and high unemployment.
Governments try to smooth the cycle, using fiscal and monetary policy, to avoid both high inflation and high unemployment.
Output has fallen for six months and unemployment is rising. Which phase is the economy in?
- Falling output for two quarters.
- Rising unemployment.
Answer: Recession
Phases: boom, downturn, recession, recovery. Booms bring high growth, low unemployment and rising inflation. Recessions bring falling output, high unemployment and low inflation.
The interactive lesson includes the diagrams for this topic.
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