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. 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.
  2. Investing

    Business Cycle

    The business cycle refers to the fluctuations in economic activity that an economy experiences over a period of time. It consists of expansions, or periods of economic growth, and contractions, ...
  3. Investing

    Sector Rotation: the Essentials

    We look at how the market signals impending economic cycles and sector performance during each stage.
  4. Insights

    Recessions and Depressions Aren't So Bad

    Downturns are a natural part of the economic cycle and actually provide some benefits.
  5. 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.
  6. Investing

    Earnings Cyclicality Exposes Profitable Trends

    Learn to explore a company's past profits to find today's opportunities.
  7. Investing

    Tips For Recession-Proofing Your Portfolio

    Do you know what to do when the economy stops cooperating? Learn how to recession-proof your portfolio.
  8. Insights

    4 Stages Of The Economic Cycle

    Here’s a list of the four basic stages of the economic cycle, and some telltale signs associated with each.
Frequently Asked Questions
  1. What's considered to be a good debt-to-income (DTI) ratio?

    Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and how to ...
  2. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ...
  3. What does a Chief Financial Officer (CFO) do?

    A CFO is responsible for accurate reporting of a company's financial information, investing the company's money and identifying ...
  4. How did George Soros break the Bank of England?

    George Soros pocketed $1 billion by betting against the British pound, cementing his reputation as the premier currency speculator ...
Trading Center