The entire financial industry rests on the fundamental concept of the market economy, which means you should be armed with some basic economic theory when you walk into the testing room.

Phases of the Business Cycle
The first concept you need to know is the business cycle, the series of fluctuations in the level of economic activity. The timing and degree of these fluctuations are notoriously unpredictable; however, there is a pattern that seems to recur with these gyrations. A hypothetical business cycle is comprised of the following phases:

  • Peak: Economic activity is growing rapidly and production facilities are operating at full capacity.

  • Contraction (Recession, Depression): Economic growth slows or the economy actually shrinks; sales decline and unemployment rises. This phase follows the peak. There are also different classifications of contractions:
    • A recession is a contraction in which gross domestic production(explained below) declines for two consecutive quarters.
    • A depression is a prolonged, severe recession.

  • Trough: Economic activity is at its lowest point in the cycle.

  • Recovery: Sales, employment levels and other measures of economic activity rebound and eventually reach a new peak. This phase follows the trough.

Phases of the Business Cycle




Exam Tips and Tricks
Memorize the order of the phases of the Business Cycle. You may have a question asking you to put them in order. Recognize that this is a repetitive cycle, so the correct sequence may begin with any phase.

Keynesian Theory

Related Articles
  1. Insights

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  2. Investing

    Business Cycle Investing: Ratios to Use For Each Cycle

    Examine economic and sector performance over the business cycle to determine which ratios are most important for each phase of the cycle.
  3. Investing

    Understanding Market and Full Risk Cycles

    Investor need to understand the four stages the markets tend to experience.
  4. Investing

    The 4 Stages of the Investor Emotion Cycle

    Investors have an emotional counterpart to each of the four stages of the market cycle.
  5. Insights

    The Best Business To Be In During A Recovery (And Why)

    Where are the best places to be when an economy starts to recover?
  6. Investing

    Company Survival: Cash Conversion Cycle Is Key

    Find out how to use this figure to analyze a firm's financial condition.
  7. Insights

    Is a Recession Coming?

    Even as a number of economic indicators look good, global conditions and inflation levels point to the imminence of another recession.
  8. Trading

    Stock Option Expiration Cycles

    Understanding expiration cycles is just one more way to help you increase your success rate when trading options.
Frequently Asked Questions
  1. When are Beneficiaries of a Will Notified?

    Learn when the beneficiaries of a will must be notified, and understand how this requirement varies depending on whether ...
  2. Why Does Larry Page Pay Himself a $1 Salary?

    Google co-founder Larry Page continues to take an annual salary of only $1 as chief executive officer.
  3. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  4. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
Trading Center