7.1. The Business Cycle

The national economy fluctuates in more or less regular patterns of activity consisting of alternating periods of economic growth and decline. These are called business cycles, and they consist of four distinct phases. The first phase, expansion, is characterized by an increase in economic activity and above average economic growth. In this phase, the production of goods rises and unemployment falls. Credit is available because banks believe businesses and people will be able to repay their loans. Available credit means lower interest rates, which fuels expansion, resulting in more jobs. The expansion phase feels good to the average person, because jobs are plentiful and wages rise. A risk of the expansion phase is the possibilit