In the next phase, we delve into the concept of inflation, explaining how the purchasing power of currency changes over time. To gain an understanding of how inflation is managed, we explore the critical roles of entities like the Federal Reserve and the tactics they employ, such as monetary policy. We then examine fiscal policy, another crucial instrument wielded by governments to influence economic health.

As we continue our journey, we navigate through the fundamentals of supply and demand, the forces that shape the marketplace. From there, we’ll venture into the concept of elasticity.

Let’s first talk about economic business cycles, which explain the health of an economy. The economy’s health is based on the gross domestic product (GDP), which is a country’s economic output.

Business Cycles Chart

When we are at a low point of economic output, that is known as a trough. The opposite is a peak, which is a high level of economic output. A peak is the point at the top (i.e., our maximum economic output).

When you’re getting from a trough up to a peak, the process is known as a recovery phase or an expansionary phase. In this process, the economy is becoming healthier (i.e., your economic output is increasing). When you’re going from a peak down to a trough that’s known as a recession or a contractionary phase. You’re getting worse as an economy (i.e., your economic output is decreasing). An economic depression is a severe version of a recession.

Study Tip: The four parts of the business cycle are peak, trough, expansionary, and contractionary.