A1.2. The Business Cycle

The level of activity in the financial markets, and the monetary value of that activity, are inextricably linked to the state of the economy. Although it is common to speak of “the economy” as if it were a static, unitary thing, the economy is a variable, highly dynamic system that is constantly changing.

Changes in the economy as a whole are known as business cycles. The name comes from the cycles of expansion and contraction in economic activity that occur over time. Business cycles are sometimes referred to as economic cycles. Although the name “cycle” suggests a regular or predictable occurrence, changes in business cycles occur irregularly, and thus, each cycle varies in its severity and duration.

A full business cycle is comprised of four phases: expansion, peak, contraction, and trough. The progress of a business cycle is often measured by reference to the gross domestic product (GDP), which is the aggregate market value of all completed goods and services produced within a given country in a single year.

• Expansion. When the economy is in expansion, it exhibits above-average growth. Economic activity increases, and consequently so does GDP. Unemployment tends to fall du