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Definition: Contraction

Business cycles represent the economic activity in an economy. A contraction is that phase of economy between the peak and a trough when the economy is slowing down. An economy is said to be slowing down when the real GDP has been declining for a period of two or more consecutive quarters.

When the economy is slowing down, there is usually trouble for the people because they start losing their jobs due to layoffs. This in turn leads to additional difficulties. The intensity of the contraction predicts the duration it lasts.


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