B. Inflation
As the cycle moves into the peak, demand for goods overtakes supply and prices rise. This creates inflation. During inflationary times, there is too much money chasing more for their items causing prices to rise. This, in turn, reduces the purchasing power of the consumer.
As prices rise, demand slackens which causes economic activity to decrease. The cycle then enters the recessionary phase.
C. Deflation
As business activity contracts, employers lay off workers and demand slackens. Usually, this cause prices to fall creating deflation. The cycle enters the trough. Deflation is the persistent and appreciable fall in the general level of prices. Eventually, lower prices will stimulate demand and the economy moves into the next cycles, expansion.
2. Gross National Product (GNP)
One of the most significant measures of economic activity is the Gross National Product (GNP). GNP is the total value of goods and services produced by the entire US economy. Components of the GNP include consumer spending, investments, government spending, and net exports.
A recession occurs when Real GNP (Gross National Product adjusted for inflation) has declined for two successive quarters.
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