Part A — Phases, drivers and indicators
This worksheet builds the skill of describing the business cycle and reading its phase from macroeconomic indicators — a foundation for the AE, AD/AS and policy lessons that follow.
Phases and drivers
1. On the axes below (real GDP against time), sketch a business cycle around a rising long-run trend. Label an expansion, a peak, a contraction and a trough.
2. Explain how a rise in aggregate demand can move the economy from a trough into an expansion. Refer to at least one component of aggregate demand.
Indicators
3. Complete the table by describing the typical movement of each indicator in each phase.
| Indicator | Expansion / peak | Contraction / trough |
|---|---|---|
| Real GDP growth | ||
| Unemployment rate | ||
| Inflation rate | ||
| Business confidence |
4. Distinguish between a leading and a lagging indicator, giving one example of each.
Interpretation
5. An economy reports: real GDP growth −0.4% then −0.6% in consecutive quarters; unemployment up from 4.0% to 5.1%; inflation easing. Identify the phase of the cycle and justify your answer with the data.
6. Explain why a slowdown in the rate of GDP growth is not the same as a contraction.