Question

Explain the theory of the business cycle. What is the empirical evidence on this theory? Select any three countries to highlight your answer. Do your results support the classical/neoclassical or modern political economy school of thought?

Answer 1

The business cycle consist of below stages namely -

Expansion - In this stage the velocity of money is high, there is increase in investment, employment, wages etc.

Boom- This is the stage where the economy expansion has reached its peak and this is the saturation point of expansion.

Recession- At this stage economy is moving from boom to normal which is painfull period where in there is decrease in demand for goods and services, the supply is in excess and fall in prices.

Depression - This is the stage where there is negative growth and economy is in downturn and less economic activity

Trough - This is the saturation point of negative growth.

Recovery - Once the economy reached at the saturation point of negative growth, it recover again.

These stages explains the neoclassical theory of JM Keyness.

The recent example of business cycle can be seen in 2008 recession of homeloan bubble United States. The great economic depression of 1930. United States, United Kingdom and Germany are examples.