Business Cycle

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Definition of 'Business Cycle'

The business cycle is the periodic fluctuations in economic activity, typically measured by changes in real GDP and other macroeconomic variables, lasting approximately two to ten years. It is generally accepted that there are four stages in the business cycle: expansion, peak, contraction, and trough.

During an expansion, economic activity is increasing, businesses are investing and hiring, and employment is rising. The peak is the highest point in the business cycle, when economic activity is at its peak. A contraction occurs when economic activity is declining, businesses are cutting back on investment and hiring, and employment is falling. The trough is the lowest point in the business cycle, when economic activity is at its lowest.

The business cycle is a complex phenomenon that is influenced by a variety of factors, including changes in consumer spending, investment, government spending, and monetary policy. The business cycle can have a significant impact on businesses, workers, and the economy as a whole. During an expansion, businesses can grow and profits can increase. However, during a contraction, businesses can struggle and profits can decline. The business cycle can also lead to unemployment, as workers are laid off when businesses cut back on production.

There are a number of ways to manage the business cycle. Monetary policy, which is the setting of interest rates by the central bank, can be used to stimulate the economy during a contraction or to cool it down during an expansion. Fiscal policy, which is the government's spending and taxation policies, can also be used to influence the business cycle.

The business cycle is a natural phenomenon that is part of the functioning of a market economy. However, the government can take steps to mitigate the effects of the business cycle and to promote economic stability.

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