Question

The business cycle model shows short-term fluctuations in the level of economic activity along a long-term trend. Examine the two business cycle phases that can occur in a nation.

Answer 1

Answer) Business cycle has 4 phases namely Expansion,Peak,Contraction and Trough,we will examine Expansion and Contraction and will also discuss Peak and Trough wherever required.When we talk about expansion,we are looking at a nation which is growing in terms of economy,demand is high in nation,unemployment is low,more investment is flowing in ,people 's purchasing power is going up ,it is an ideal phase ,it continues expanding and reaches a peak,a point where demand has reached its limit,inflation has increased and pace of growth is no longer there,once it reaches peak,demand starts drying up,as demand dries companies no longer need the same workforce,indeed they are overstaffed as they cut production leading fall in employment,once unemployment increases,people 's purchasing power decreases and economy 's growth further falls and it reaches a trough after this contraction,a point where demand has hit rock bottom and agin start picking leading to same cycle again.

Now,let us understand with help of an example(in fact you will see it many times if nation is going through rapid or slow growth),generally an expansion and contraction period starts with rise(fall for contraction) of sales of automobiles,it is first indication that economy is shifting to a different phase,which is then followed by good (poor for contraction) production numbers,good(poor for contraction) manufacturing numbers followed by similar date in jobs report and then GDP growth rate confirms the trend,these business cycles can be affected by various reasons such as the pandemic we are in,where in lot of countries contraction period with low to no production was seen leading to trough and again a new cycle is seen building up from that trough in March-April period,these cycles can take place owing to policy decisions such as corporate taxes.

The above explanation and example/indicators are more or less applicable in all countries which further helps us to understand how a nation in its its long run goes through periods of expansion and contraction of business cycles.

Answer is complete.Thank you!