Final answer:
Business cycles are periods of macroeconomic expansion and contraction around a long-term growth trend, marked by the fluctuation in real GDP and other economic indicators. They consist of four phases: expansion, peak, contraction, and trough, influencing employment, investment, and overall economic health.
Step-by-step explanation:
Business cycles are fluctuations in economic activity that occur around a long-term growth trend. These cycles consist of periods of macroeconomic expansion, followed by a period of macroeconomic contraction. The four phases of the business cycle include expansion, peak, contraction, and trough. During expansion, economies see growth in real GDP and employment, whereas contraction might involve increased unemployment, falling incomes, and decreasing economic output, potentially leading to a recession.
Looking at historical data, such as the investment by private firms in physical capital in the U.S. economy, we can see how the business cycles have affected real GDP growth rates over time. For instance, the investment increased from 14.1% of GDP in 1993 to 17.2% in 2000 before declining in the following years. These shifts can lead to inflationary pressure or economic downturns and are the result of changes in aggregate supply and demand. To stabilize the economy, governments may intervene with fiscal policy measures.