If unemployment is about 5% and inflation is rising at about 2% per year, where in the business cycle is the economy?

The economy described, with an unemployment rate of about 5% and an inflation rate rising at approximately 2% per year, indicates that it is in the recovery phase of the business cycle. During the recovery phase, economic activity begins to increase following a recession, which is characterized by rising employment levels, increased consumer spending, and gradual inflation.

A 5% unemployment rate suggests that the economy is moving toward full employment, which is typically associated with recovery. Additionally, a moderate inflation rate of 2% is manageable and reflects an economy that is experiencing growing demand, where prices are increasing but not out of control.

In contrast, other phases of the business cycle suggest different economic conditions. A recession would involve high unemployment and low demand, while a peak would indicate that the economy is at its highest point before a downturn, typically characterized by very low unemployment and possibly higher inflation. Contraction refers to a decline in economic activity, again associated with rising unemployment and lower consumer confidence. Thus, the data presented aligns most closely with the characteristics of a recovery phase.