Definition
The business cycle is the recurring pattern of expansion, peak, contraction (recession), and recovery in an economy over time.
Why It Matters
Understanding the business cycle helps economists, businesses, and governments anticipate changes in economic activity. Output, employment, investment, and consumer spending tend to rise during expansions and fall during recessions. Policymakers often use fiscal and monetary policy to stabilize these fluctuations.
Example
During a strong expansion, companies hire more workers and increase production. If demand later slows, businesses may cut investment and lay off workers, pushing the economy into a recession before eventual recovery begins.