Question

A) What are the four phases of the business cycle? How long do business cycles last? How do the rate of unemployment and the rate of inflation typically behave in each phase?

B) This council, an advisory body with business and union representation, decided to rethink the concept of unemployment. It was intent on unraveling the paradox of substantial new job creation coupled with a high and largely unyielding jobless rate. How could this paradox come about?

Answer 1

A) Business Cycle is a key feature of the economy and comprises of four components i.e., boom, recession, slump and recovery.

Boom: During boom period, an economy exhibits steady pace of economic growth, high growth in income, employment and purchasing power of people and expansion of different sectors. However during boom period, inflation of essential items also rise considerably. Because of economy in full employment scale during boom period, there is little or negligible scope of additional job creation in the economy.

Slump: This is the next phase of the business cycle and during this stage, there has been continuous fall in industrial output, consumer demand, employment rate, interest rate and trade. As a result of falling employment and consumer demand, inflation rate of certain items fluctuates according to market demand and supply factors.

Recession: It is also termed as economic slowdown period aand during economic downturn, there has been slow down in all sectors. Unemployment rate also becomes high during this period. Business, trade, standard of living of people all display downward trend during recession. There has been sharp decline in new job creation in the economy and as a result demand for goods and services also fall. As a fall in the consumer demand, inflation rate also falls proportionately during recession.

Recovery: This is the fourth phase of the business cycle in which an economy shows improvement signs. Almost all key economic sectors show positive signs with rising employment, demand of industrial products, external trade and expansion of bank loans to agriculture and industries.   During recovery stage, income and standard of living of people also rise considerably and inflation of food grains and industrial products also shows moderate upswings.

B) The paradox of substantial job addition along with high unyeilding jobless rate can could come about through

1. Declining labour force participation rate

2. Rising rate of dissatisfied employees

3. Low or static wage rate and

4. Decline in labor force