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Economic cycle

Economic cycle refers to the typical business cycle. In normal times the economy as measured by Gross Domestic Product (GDP) tends to grow at a somewhat faster rate than factors like population growth. Periodically the economy slows down and perhaps even contracts. When the economy contracts for two consecutive quarters, an official recession is declared.

Often the Federal Reserve Board uses interest rates to regulate the economy--low interest rates to stimulate the economy in slow times or high interest rates to attack inflation when the economy is thought to be overheated. Usually the Fed works to smoothe out the cycles in an effort to achieve orderly growth. If uncorrected, excesses can lead to severe downturns such as occurred during the Great Depression. Hyperinflation is another excess known to be destructive to the economy. Hence, the Fed works to limit extremes in the economy for the good of all.

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