Business Cycle Theory

The business cycle theory describes the fluctuations in economic activity over time, characterized by periods of expansion and contraction. During expansions, the economy grows, with rising production, employment, and income. This phase may lead to inflation as demand increases. Conversely, during contractions or recessions, economic activity declines, leading to reduced production and rising unemployment. These cycles are influenced by various factors, including consumer confidence, government policies, and external shocks. Understanding these cycles helps economists and policymakers anticipate changes in the economy and implement measures to stabilize growth.