Question

The phases of the business cycle include (select all that apply):

Question 25 options:

	Inflation.
	Expansion.
	Contraction.
	Deflation.

Answer 1

A business cycle is a cycle of fluctuations in the Gross Domestic Product ( GDP) around its natural growth rate over the longer term. It illustrates how an economy experiences expansion and contraction of economic activity over time. Once it goes through a single boom and a single series contraction, a business cycle is completed. The period of time to complete this sequence is called business cycle length. A boom is characterized by a period of rapid economic growth whereas recession is a period of relatively stagnant economic growth. These are calculated in terms of real GDP production, which is balanced for inflation.

Stages of the Business Cycle

Expansion :

Expansion is the first step in a business cycle. At this point, positive economic indicators such as employment, revenue, production, salaries, sales, demand and the provision of goods and services are growing. Debtors generally pay their debts on time, money supply velocity is high and investment is high. This cycle will continue until the economic conditions are favorable Expansion .

Peak (inflation) :

The economy then hits a point of saturation, or peak, that is the second stage of the business cycle. Growth limit is reached to maximum. The economic indicators are not rising any further and are at their height. Prices are on a high. This stage marks the point of turnaround in the economic growth pattern. Around this point customers are likely to restructure their budgets.

Recession (contraction) :

The recession is the result of the peak period. In this step demand for goods and services is starting to decline rapidly and steadily. Producers do not immediately note the drop in demand and go on producing, which causes a market condition of excess supply. Prices begin to plunge. Consequently, all positive economic indicators such as production, output, salaries, etc. are starting to decline.

deflation (trough) :

Unemployment is on a commensurate increase. Economic growth begins to decline, and as this falls below the constant line of growth, the stage is called depression. In the stage of depression the growth rate of the economy is negative. Further decline continues until factor rates, as well as demand and supply of goods and services, hit their lowest level. At the end, the economy hits the trough. For an economy it's the negative saturation point. Public revenue and spending was widespreadly exhausted.