Explain the four phases of a typical business cycle.

The four phases of a typical business cycle are expansion, peak, contraction, and trough.

1. Expansion: This phase is characterized by an increase in economic activity, such as rising GDP, employment, and consumer spending. During this phase, businesses experience growth, investments increase, and consumer confidence is high. Expansion is often accompanied by low inflation rates and low interest rates set by the central bank to stimulate economic growth.

2. Peak: The peak phase represents the highest point of economic activity in the business cycle. It is characterized by a slowdown in the rate of expansion and the beginning of a transition towards contraction. At this stage, the economy is operating at or near its full capacity, and inflationary pressures may start to build up. Business and consumer confidence may still be relatively high, but signs of potential economic slowdown become more apparent.

3. Contraction: Also known as a recession or downturn, the contraction phase is marked by a decline in economic activity. GDP growth slows down or becomes negative, leading to reduced business investments, declining consumer spending, and rising unemployment rates. During this phase, businesses may cut back on production, leading to lower profits and potential bankruptcies. The central bank may respond by lowering interest rates to stimulate economic activity.

4. Trough: The trough phase represents the lowest point of the business cycle. It is characterized by a bottoming out of economic activity and the beginning of a transition towards expansion. At this stage, the economy has reached its lowest point, and indicators such as GDP, employment, and consumer spending start to stabilize or show signs of improvement. Business and consumer confidence may still be low, but the worst of the economic downturn is typically over.

It is important to note that the duration and severity of each phase can vary in different business cycles. Additionally, business cycles are influenced by various factors such as fiscal and monetary policies, global economic conditions, technological advancements, and consumer behavior.