1. Reading the Business Cycle

2. Real GDP is at its highest point of the business cycle.
Real output in the economy is decreasing, and the unemployment rate is rising. As the contraction continues, inflationary pressures subside. If the recession continues long enough, prices may actually start to fall, a situation known as deflation.
The lowest point of real GDP reached during the business cycle is known as the trough. If the trough is particularly deep, it may be called a depression. A depression is an economic situation where the level of output falls to especially low levels and unemployment climbs to very high levels relative to the historical average.
Peak
Contractionary
Expansionary
Real GDP is at its highest point of the business cycle.
Expansionary
Long-run trend of real GDP
Real output in the economy is increasing and the unemployment rate is declining. As the economic expansion continues, inflation may begin to accelerate.
Trough

3. Long-run trend of real GDP
- Inflation
- Interest rates are high
- Low unemployment 4%
Peak
Contractionary
Expansionary
Expansionary
Long-run trend of real GDP
Trough
A recession occurs when real GDP falls for two consecutive quarters.
- Deflation
- Interest rates are low
- High unemployment +6%

4. Contraction/Expansion of the Business Cycle
Drop in business spending
High unemployment (6 - 10% in recession)
Interest rates go from high to low
Consumer confidence
Saving for a rainy day
Deflation may occur
Expansion
Business investments increase
Interest rates go from low to high
Consumer confidence increases
Low unemployment
Inflation may rise