The business cycle refers to the periodic but irregular up and down movements in economic activity, as measured by real GDP. Business cycles involve alternating periods of expansion (boom) and contraction (recession or depression). Recent cycles have become less severe, with expansions lasting longer and contractions shorter on average. The four main phases of the business cycle are recession, depression, recovery, and boom. Leading economic indicators can provide insight into where the economy may be in the business cycle around 12-15 months in the future.

1. BUSINESS CYCLES

12. Multiplier & Accelerator: Sales 1000 1000 2000 3000 3500 3500 3400 machines 10 10 20 30 35 35 34 Induced INV. 0 10 10 5 0 0 Replacement INV. 1 1 1 1 1 0 Total Inv. 1 11 11 6 1 0

13. Indicators: indicator recovery boom Industrial production. Gradual increase high Commodity prices -do- -do- Cost of production Increases but slower than commodity prices Increase faster than recovery profits satisfactory high

14. Investment Replacement High Employment Gradual increase Rapid increase Bank loans Liberal High demand for advances Speculation Increases high Inventory stocks Fall Zero Business failures Rare Zero Business expectations Cautious but optimistic optimistic

20. Variables: Pro-cyclical Countercyclical Industrial production Unemployment Commodity prices Inventory stocks Cost of production Business failures Profits Investment Wages Bank loans