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Economic Cycle

Also called: Business cycle

What is an economic cycle?

An economic cycle measures an economy's performance over time. It has four notable periods before the cycle renews: expansion, peak, recession, and trough.

During expansion, GDP is rising while unemployment is decreasing-- typically due to increasing consumer spending, causing an increase in demand and therefore pushing companies to increase production. At peak, this expansion starts to slow as GDP starts to shift downward, marking the next part of the cycle, recession. In a recession, consumer spending slows, causing GDP to decrease. In response, companies slow down production to prevent overproduction due to lower demand and may have to lay off workers as a result, increasing unemployment.

Federal governments and centralized banks can help an economy recover from a recession. Interest rates may be cut to convince consumers to increase their spending, thereby raising GDP and possibly creating a new expansion period. The period just prior to expansion, when the economy is at its lowest, is known as the trough.