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Economic Cycle

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The economic cycle is the periodic fluctuation of the economy between periods of growth and contraction. The major phases of the economic cycle are expansion, prosperity, contraction and recession. Governments and central banks often intervene to smooth the peaks and valleys of the economic cycle. For example, the Federal reserve may restrict the money supply in good times to slow the expansion phase of the economic cycle, and deficit spend and cut interest rates to ease the recessionary phase of an economic cycle.

Inappropriate intervention can lead to significant failures. Attempting to lengthen the expansionary phase of the economic cycle, for example, can lead to a speculative bubble which can in turn magnify an ensuing downturn. Economists do not generally believe it is possible to eliminate the economic cycle.

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