Question

1. Explain the basic concept of the business cycle (inflation, growth, GDP, recession, depression, deflation, and recovery). Discuss what is happening at each stage. Explain monetary policy and fiscal policy and explain how they are used to “flatten” the business cycle during various stages.

Answer 1

Business Cycle

A business cycle is an economic cycle of fluctuations found in the aggregate output of nation. It is an natural phenomena kahich consist of sequential call and dise of aggregate output or GDP of a nation.

This expansion and concraction of national income create stages in the economy called as Boom, Recession, Depression and recovery.

4 stages of Business Cycle

Recession

A well booming economy starts slowing down and show recessionary trans when new firms enter in economy and captures market. This results into disinvestments from older firms, business failure, it increases bank's non performing assets. This results into unemployment, decreased demand, unused capacity, and decreased purchasing power. Inflation starts decreasing.This conditions affect market in negative manner and GDP starts decelerating

Depression

Depression is later stage of ression. It shows the fall in national income and negative grawth. Recession results in demand shortfall, this affects whole market badly. New industries also starts failing due to lack of demand. Unemployment increases. Investments stops, resources remains unutilized and national income decreases.

Recovery

Recovery is the condition when economy starts reviving . Capital goods have limited life. After some time capital deteriorates this needs to be replaces. This create demand for capital goods. Consumer goods demand. Consumer goods are also required to be produced to maintain minimum standard of living so it capital replacement also create demand. Since wage rates are low investments become cheaper. So investments increase and production starts. This create demand and economic activities starts accelerating.

Boom

During the revival period increased spending create complementary demand in the economy. This shows multiplier effect in the economy. Effective demand increases. To fulfill this new demand investments starts. New innovation takes place. Inflation remains moderate which stimulate investors to invest and produce more. This whole stage create prosperity in economy. Unemployment decreases, resources get fully utilised and national income increases substantially.

Like this business cycle shows cyclical tendency.