In economics, the circular flow model is a basic representation of how money moves through society. The model demonstrates how money flows from producers to workers as wages and then back from workers to producers as workers spend money on products and services .
The economic cycle, also known as the business cycle, refers to economic fluctuations between periods of expansion and contraction. Factors such as gross domestic product (GDP), interest rates, total employment, and consumer spending can help determine the current stage of the economic cycle. The cycle is characterized by four stages: expansion, peak, contraction, and trough. During expansion, the economy experiences relatively rapid growth, interest rates tend to be low, and production increases. The peak of a cycle is when growth hits its maximum rate. Prices and economic indicators may stabilize for a short period before reversing to the downside. A correction occurs when growth slows, employment falls, and prices stagnate. As demand decreases, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in prices. If the contraction continues, the recessionary environment may spiral into a depression. The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before recovery .
