Business Cycle
Measuring Economic Activity and Illustrating Its Variations
AO2·AO4·Diagram required
Syllabus requirement
Shows short-term fluctuations (booms/recessions) and long-term growth trend (potential output) in real GDP.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram of the business cycle showing the phases: expansion, peak, contraction, trough, and long-run growth trend (potential output).
Summary
The business cycle describes short-term fluctuations in a country's economic activity — expansions (booms), peaks, contractions (recessions), troughs (slumps) and recoveries — while also showing the long-run growth trend (potential output). Understanding the business cycle helps explain changes in real GDP, unemployment and inflation over time and guides policy responses during downturns and booms.