AP Macroeconomics

## Learning Outcomes

- Define the four standard phases of the business cycle
- Identify how real GDP and unemployment tend to change in each phase
- Distinguish between expansion and recovery, and between contraction and recession
- Label peak and trough correctly on a business cycle graph
- Explain why business cycles are hard to predict and do not follow a fixed schedule
- Avoid common exam errors about recession definitions

## AP Macroeconomics Syllabus

For the AP Macroeconomics, you are expected to understand business cycle phases defined, with a focus on the following syllabus points:

- Know that the standard AP terms are **expansion**, **peak**, **contraction**, and **trough**
- Identify the usual sequence: expansion → peak → contraction/recession → trough → expansion
- Explain how **real GDP** changes across the cycle and why it is a main indicator
- Understand that unemployment usually moves in the opposite direction to real GDP over the cycle
- Explain the difference between a **contraction** and a **recession**
- Know that a recession is not officially defined only by two consecutive quarters of negative real GDP growth
- Recognise that the **NBER Business Cycle Dating Committee** identifies official U.S. peaks and troughs
- Understand that peak and trough are turning points, not long periods

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What are the four standard phases of the business cycle in AP Macroeconomics?
2. How do real GDP and unemployment usually change during an expansion?
3. What is the difference between a contraction and a recession?
4. Why is “two negative quarters of real GDP” only a shortcut and not the full official definition of a recession?
5. On a business cycle graph, what do the peak and trough represent?

## Introduction

Business cycles are the recurring ups and downs of overall economic activity. On the AP Macroeconomics exam, you are often expected to recognise the phases on a graph, define them accurately, and connect them to indicators such as **real GDP** and unemployment.

This topic looks simple at first, but students often lose marks by mixing up phases with turning points, or by using a sloppy definition of recession. A strong answer uses precise terms and follows the logic of how output, employment, and economic activity move over time.

> **Key Term: business cycle**
> The recurring pattern of fluctuations in aggregate economic activity over time, usually described as expansion, peak, contraction, and trough.

### The four phases of the business cycle

The cleanest way to remember the cycle is:

- **Expansion**
- **Peak**
- **Contraction** or **recession**
- **Trough**
- then back to **expansion**

A business cycle is usually shown on a graph with **real GDP** on the vertical axis and time on the horizontal axis. The line rises and falls around the economy’s longer-run growth trend.

> **Key Term: real GDP**
> The inflation-adjusted value of total output produced in an economy; it is a main indicator used to track business cycle movements.

#### Expansion

An **expansion** is the phase from trough to peak. During expansion, real GDP rises. Firms produce more because demand is increasing, and this usually leads to more hiring.

That means several things tend to happen together:

- output rises
- income rises
- employment rises
- cyclical unemployment falls

Students should avoid saying unemployment becomes zero. Even in a healthy economy, there can still be frictional and structural unemployment. The key point is that **cyclical unemployment** usually falls during expansion because firms need more workers as production increases.

> **Key Term: expansion**
> The phase of the business cycle in which real GDP rises from a trough toward a peak, usually with rising employment and falling cyclical unemployment.

Why does this make sense? If businesses expect stronger sales, they increase production. To do that, they often need more labor and more hours of work. So rising output and falling cyclical unemployment are linked.

#### Peak

A **peak** is the highest point of economic activity in a cycle before a downturn begins. It is not a long phase. It is a turning point.

At the peak:

- real GDP is at a cycle high
- unemployment is usually at or near its lowest point in the cycle
- inflationary pressure may be stronger because the economy is producing at a very high level

Students often treat the peak as “the good part” of the graph. That is too vague. The better description is that the peak is the last point before output starts to fall.

> **Key Term: peak**
> The highest point of economic activity in a business cycle, marking the end of an expansion and the start of a contraction.

A peak matters because it signals a change in direction. On an exam graph, do not label a whole upper section “peak.” Label the exact top turning point.

#### Contraction

A **contraction** is the downward phase of the cycle from peak to trough. Real GDP falls, so production declines. Because firms are producing less, they generally need fewer workers. That is why cyclical unemployment usually rises during contraction.

Typical features are:

- falling real GDP
- lower production
- lower income
- rising cyclical unemployment
  > **Key Term: contraction**
  > The phase of the business cycle in which real GDP falls from a peak toward a trough, usually with falling employment and rising cyclical unemployment.

This relationship is important. Less production does not just mean “fewer goods.” It also means less income is being generated in the economy, since production creates income for workers and firms. That is why contractions are linked to weaker labor markets.

#### Trough

A **trough** is the lowest point of economic activity in the cycle. It marks the end of the contraction and the start of the next expansion.

At the trough:

- real GDP is at a cycle low
- cyclical unemployment is usually at or near its highest point
- the economy stops falling and begins to recover
  > **Key Term: trough**
  > The lowest point of economic activity in a business cycle, marking the end of a contraction and the beginning of an expansion.

Like the peak, the trough is a turning point, not an extended period. On a graph, it is the bottom turning point where the line stops falling and starts rising.

> **Test Tip:** On a business cycle graph, the upward slope is expansion, the downward slope is contraction, the top point is the peak, and the bottom point is the trough. Students often label a region when the exam wants the exact turning point.

### Recession, contraction, and recovery: distinctions students often miss

These words are related, but they are not fully interchangeable.

#### Contraction vs recession

A **contraction** is the general downward phase from peak to trough. A **recession** is a significant decline in economic activity spread across the economy that lasts more than a few months.

In many intro courses, teachers use “contraction” and “recession” almost as the same thing. For AP purposes, that can work in basic graph questions, but there is a more precise distinction:

- every recession occurs during a contractionary period
- not every short decline is necessarily officially labelled a recession

That is why using the word “contraction” can sometimes be broader and safer when describing the phase of the cycle.

> **Key Term: recession**
> A significant decline in economic activity spread across the economy that lasts more than a few months; in U.S. dating, it runs from a peak to a trough.

A very common shortcut says recession means **two consecutive quarters of negative real GDP growth**. That can help in simple classroom questions, but it is not the full official U.S. definition.

The official U.S. chronology is determined by the **NBER Business Cycle Dating Committee**, which looks at several indicators, not just quarterly GDP. These include output, income, employment, and production across the economy.

> **Key Term: NBER Business Cycle Dating Committee**
> The group that identifies the official U.S. business cycle chronology by dating peaks and troughs in economic activity.

This matters because the AP exam may reward precision. If a question asks for a recession definition, it is stronger to say that it is a significant and widespread decline in economic activity, rather than only repeating the “two quarters” rule.

#### Expansion vs recovery

A **recovery** is often used to describe the early part of an expansion, especially just after a trough. In many classrooms, recovery is treated as part of expansion rather than as a separate fifth phase.

So:

- **expansion** = the full upward phase from trough to peak
- **recovery** = often the early stage of that upward phase

If your teacher uses recovery separately, place it just after the trough. If not, treat it as part of expansion.

Why does this distinction matter? Because some students write five phases when AP materials usually focus on four: expansion, peak, contraction, trough.

> **Test Tip:** If a multiple-choice item asks for the standard AP business cycle phases, choose expansion, peak, contraction, and trough. Do not assume recovery is a separate official phase unless the question clearly frames it that way.

### How to interpret a business cycle graph

Many AP questions do not ask for long explanations. They show a graph and ask you to label or identify phases. That means you need a method.

Start with the axes:

- vertical axis: **real GDP**
- horizontal axis: **time**

Then read the shape:

- line rising = expansion
- top turning point = peak
- line falling = contraction
- bottom turning point = trough

Now connect unemployment:

- when real GDP rises, cyclical unemployment usually falls
- when real GDP falls, cyclical unemployment usually rises

This inverse relationship is central to interpreting the graph. It follows from production decisions by firms. When demand for goods and services is stronger, firms produce more and hire more. When demand weakens, firms cut output and need fewer workers.

A useful one-sentence memory aid is:

- **GDP up, cyclical unemployment down**
- **GDP down, cyclical unemployment up**

You should also know that business cycles do not follow a fixed timetable. The graph in a textbook may look smooth and regular, but real economies are not that neat. Some recessions are short and sharp; some expansions last many years. That is one reason business cycles are difficult to predict.

This is also why peak and trough dates are identified after economists study the data. In the U.S., for example, the NBER dated a recent peak at **February 2020** and the trough at **April 2020**. That shows how official dating focuses on turning points in actual economic activity.

### Why these definitions matter for AP questions

At AP level, a weak answer says:

- “Expansion is when the economy does well.”

A stronger answer says:

- “Expansion is the phase from trough to peak in which real GDP rises and cyclical unemployment usually falls.”

The second answer is better because it uses:

- the correct phase boundaries
- the correct indicator, real GDP
- a linked labor-market outcome

That same standard applies to all four phases. Precise wording earns marks because it shows you understand the movement of the economy, not just the everyday meaning of words like “boom” or “slump.”

You should also be careful not to overstate certainty. Unemployment usually moves opposite to output in basic business cycle analysis, but in real economies it can lag. For AP graph questions, though, the standard rule is the one you should use unless the prompt gives unusual data.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- A business cycle is the recurring pattern of fluctuations in aggregate economic activity over time
- The standard AP sequence is expansion, peak, contraction, trough, then expansion again
- Expansion is the phase from trough to peak and is usually associated with rising real GDP and falling cyclical unemployment
- Peak is the highest point of economic activity before a downturn begins
- Contraction is the downward phase from peak to trough and is usually associated with falling real GDP and rising cyclical unemployment
- Trough is the lowest point of economic activity before expansion begins again
- Peak and trough are turning points, not long phases
- Real GDP is a major indicator used to track business cycle movements
- Cyclical unemployment usually moves in the opposite direction to real GDP across the cycle
- Recession is a significant decline in economic activity, not just a casual synonym for “bad times”
- Two consecutive quarters of negative real GDP growth is a rule of thumb, not the full official U.S. definition of recession
- The NBER Business Cycle Dating Committee identifies official U.S. peaks and troughs

## Key Terms and Concepts

- business cycle
- real GDP
- expansion
- peak
- contraction
- trough
- recession
- NBER Business Cycle Dating Committee


Business Cycles - Business cycle phases defined