Unit 1 · Level 2 · The business cycle
The economy's four seasons
Zoom out far enough and every economy moves in waves: a stretch of growth, a hot peak, a painful contraction, then a slow climb back. Economists call it the business cycle: expansion, peak, recession, recovery. The waves are irregular: some expansions last a decade, some recessions are over in months. But the rhythm itself keeps returning.
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What you get asked
What defines an EXPANSION phase?
Expansion is about the real economy: output growing, firms hiring, incomes rising. Stocks and rates often move with it, but they don't define it.
Starting just after a downturn ends, put the business cycle phases in order
Recovery blends into expansion, the boom overheats into a peak, and the contraction that follows resets the cycle. Then it starts again.
What usually marks the PEAK of the cycle?
At the peak everything looks great, and that's exactly the trap. Factories and workers are maxed out, prices push up, and there's nowhere to go but sideways or down. Unemployment is at its LOWEST here, not highest.
A common rule of thumb calls it a recession when GDP shrinks for ___ quarters in a row.
Two consecutive quarters of falling GDP is the classic shorthand. Official arbiters (like the NBER in the US) also weigh jobs and incomes, so the label can differ from the rule.
Why is the 'four seasons' analogy for the cycle imperfect?
Seasons run on a calendar; cycles don't. The US expansion of 2009-2020 lasted almost 11 years, while the 2020 COVID recession was over in two months. Same rhythm, no schedule. 🐜
The rest of this unit
Learn the economy's heartbeat: expansion, peak, recession, recovery.