Question

Compare and contrast the phases of the business cycle.

Answer 1

Answer : Business cycle has 4 phases. These are :

(i) Expansionary phase : In expansionary phase of business cycle the economic growth level increase. In this phase of business cycle the production level increase and the aggregate demand increase. As production level increase in this phase hence the employment level increase. As a result, unemployment level decrease. As aggregate demand increase in this phase hence price level increase. This phase of business cycle is marked from trough to peak.

(ii) Peak phase : In peak phase of business cycle the economic growth rate is highest. In this phase of business cycle the aggregate demand is maximum and production level is maximum. Due to highest aggregate demand the inflation rate is highest. In this phase the unemployment level is minimum.

(iii) Contraction phase : The contraction phase of business cycle is exactly opposite situation of expansionary phase. In contraction phase of business cycle the economic growth continuously decrease until it reaches to trough phase. In contraction phase the production level and aggregate demand level decrease. As a result, the inflation rate fall and unemployment rate increase. This phase of business cycle is marked from peak to trough.

(iv) Trough : The trough phase of business cycle is exactly opposite situation of peak phase. In this phase of business cycle the economic growth is lowest. In this phase of business cycle the aggregate demand is minimum and production level is minimum. Due to lowest aggregate demand the inflation rate is lowest in this phase. In this phase the employment level is minimum hence the unemployment level is maximum.

This is the compare and contrast of various phases of business cycle.