Question

Tutorial 9 Week 10 Question 2 Cite and discuss the phases of a full business cycle with respect to GDP (3.5 marks) and unemployment (3.5 marks).

Answer 1

Business Cycle

Business cycle is continues natural phenomenal in which phases of contraction and expansion of aggregate output occur in cyclical manner around the long term period.

This include stages of economic growth consist of relatively rapid economc growth and relatively slow slow growth.

Based upon the growth patterns these 4 stages are.

Boom : ​​​​​

In this phase GDP increases at high growth rate and high employment rate. Hence here unemployment decreases in this phase.

After recovery demand starts reviving. This creates complementary demand in the economy which stimulate investments. Credit grows increases. Production starts. This increases employment which result into increase purchasing power which create multiplayer effect in the economy.

Recession :

Economy show recessionary trends after boom. Where GDP growth starts decreasing and unemployment increases.

Innovation led new industries cover demand in the market and old product and old industries starts disinvestments. This leads to business failure, increase in non performing credit, increased unemployment and slow growth.

Depression :

After recession purchasing power in the economy starts decreasing this lead to disinvestment and business failure. Lack of demand increase unsold output in the firms. This increases unemployment. Banks stop lending new projects. Due to uncertainty and pessimistic approach people prefer liquidity in hand. All this results into massive unemployment and fall in national income.

Recovery :

Depressionary stage doesn't stops all economic activities. Consumer good as has to be produced to maintain minimum standerd of living. This requires that the capital used in this industry need to be replaced due to depreciation of capital. This starts production in economy. Demand increases and multiplier effect starts revival. This increases employment so unemployment starts decreasing. This economy again lead to boom stage in next phase.