{"id":1108,"date":"2019-10-01T13:29:00","date_gmt":"2019-10-01T13:29:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1108"},"modified":"2026-01-07T15:39:14","modified_gmt":"2026-01-07T15:39:14","slug":"describe-business-cycle-phases","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/describe-business-cycle-phases\/","title":{"rendered":"Describe the Business Cycle and Its Phases"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Understanding Business Cycles (2022 Level I CFA\u00ae Exam \u2013 Reading 11)\",\n  \"description\": \"This CFA Level 1 Economics video covers the business cycle: its phases (expansion, peak, contraction, and trough), key indicators (leading, coincident, lagging), inflation types (cost-push, demand-pull), unemployment types, and economic theories (Keynesian, Austrian, New Classical). It explains how GDP, monetary policy, and price indices relate to growth and recession.\",\n  \"uploadDate\": \"2018-11-12T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/IP3HiHY1YA0\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=IP3HiHY1YA0\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/IP3HiHY1YA0\",\n  \"duration\": \"PT28M52S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Indicator of an economy undergoing a recession\",\n    \"text\": \"Which of the following is most likely an indicator of an economy that is undergoing a recession?\\n\\nA. When the central bank starts buying back treasury securities\\n\\nB. When there is a huge decline of economic activities in the business sector\\n\\nC. When the real GDP has two consecutive quarters of negative growth\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"C. When the real GDP has two consecutive quarters of negative growth.\\n\\nA recession is often technically defined by two consecutive quarters of negative real GDP growth. This is the most widely recognized indicator of a recession. It shows a sustained decline in economic activity, reflecting a contraction in the economy.\\n\\nA is incorrect because the central bank buying back treasury securities is a form of monetary policy used to stimulate the economy, not necessarily an indicator of a recession.\\n\\nB is incorrect because a decline in business activity can signal a slowdown but is not the technical definition of a recession.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/IP3HiHY1YA0?si=QnLrtUt0nxeAgiE9\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<p>A business or economic cycle is defined as the persistent fluctuation in the gross domestic product of a given economy within a specified period. A business cycle can be described by periods of expansion and recessions.<\/p>\n\n\n\n<p>During a recession, the economy contracts when measured by industrial production decrement, personal incomes, employment, and sales. Conversely, during an expansionary period, there is a significant growth in economic output. Business cycles are, therefore, measured by analyzing the fluctuations of the gross domestic product of an economy. Any given business cycle generally lasts between 1 to 12 years.<\/p>\n\n\n\n<div class=\"cta-button\">\n    <a href=\"https:\/\/analystprep.com\/free-trial\/\" class=\"button small-button\" target=\"_blank\">\n        Start your free trial and master business cycle concepts!\n    <\/a>\n<\/div>\n\n\n\n<h2><strong>Phases of the Business Cycle<\/strong><\/h2>\n<h3><strong>1. Expansion<\/strong><\/h3>\n<p>The growth of global economic activity defines expansion phases. Its features include economic growth, upward pressure on prices, and an increase in employment.<\/p>\n<p>On a graph, the expansion comes after the trough, while contraction emerges after the peak and before the trough. During periods of expansion, a significant amount of the labor force is absorbed by the economic activities in the economy. This causes a reduction in the unemployment rate.<\/p>\n<h3><strong>2. Peak<\/strong><\/h3>\n<p>Peaks represent the highest value reached by some quantity in a certain period of time. For example, a peak is attained when the economy produces the highest output, inflation pressures prices to rise, and the unemployment rate is at its lowest.<\/p>\n<h3><strong>3. Contraction<\/strong><\/h3>\n<p>Contractions happen when there\u2019s negative economic growth or an economic decline. Prices decline, and the unemployment rate increases.<\/p>\n<h3><strong>4. Trough<\/strong><\/h3>\n<p>The trough is defined as the lowest point of business cycles. Here, the economy has hit rock bottom, out of which the next expansion phase will emerge. A good example of this is the 2008 financial crisis, where the unemployment rate was fairly high, and housing prices were at their lowest levels ever seen in years.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following is <em>most likely<\/em> an indicator of an economy that is undergoing a recession?<\/p>\n<p>A. When the central bank starts buying back treasury securities<\/p>\n<p>B. When there is a huge decline of economic activities in the business sector<\/p>\n<p>C. When the real GDP has two consecutive quarters of negative growth<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/p>\n<p>GDP measures the size of an economy. The most common technical indicator of a recession is two consecutive quarters of negative economic growth as measured by the GDP.<\/p>\n<\/blockquote>\n<p><em>Reading 15 LOS 15a:<\/em><\/p>\n<p><em>Describe the business cycle and its phases<\/em><\/p>\n<div class=\"notes_inv\"><hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>\n\n\n<div class=\"cta-button\">\n    <a href=\"https:\/\/analystprep.com\/free-trial\/\" class=\"button large-button\" target=\"_blank\">\n        Ready to dive deeper? Start your free trial now and practice with full solutions!\n    <\/a>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>A business or economic cycle is defined as the persistent fluctuation in the gross domestic product of a given economy within a specified period. A business cycle can be described by periods of expansion and recessions. During a recession, the&#8230;<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1108","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Business Cycle Phases Explained | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn the key phases of the business cycle, from expansion to recession, and their impact on employment and inflation.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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