The business cycle refers to the natural rise and fall of economic activity over time. It consists of four main phases: expansion, peak, contraction, and trough. During the expansion phase, economic indicators like employment and production increase, leading to a peak where the economy is at its highest point. After reaching the peak, the economy may enter a contraction phase, where growth slows down, and unemployment rises. This can lead to a trough, the lowest point of the cycle, before the economy begins to recover and enter another expansion phase. Understanding the business cycle helps policymakers and businesses make informed decisions.