Question

Respond to the following in a minimum of 175 words:

Compare and contrast the phases of the business cycle.

Answer 1

A business cycle comprises of different phases that are named as recession, depression, recovery, expansion. Recession phase is represented by decrease in aggregate demand and increase in unemployment. It happens due to slowdown in the economy and poor economic outlook, perceived by the investors and consumers. In comparison to the recession, the depression is said to be the prolonged period of recession, where the policy inaction and negative sentiments are the main reasons. It causes poor demand of labor and higher supply of workers in the economy.  In contrast to recession and depression , expansion is the phase where the economy is expanding, output is increasing and lower level of unemployment with the tight labor market situation. It makes more money chasing few goods. It is the time where the economy flourishes and inflation rate also increases. Between the depression and expansion, there is one more phase that is called as  recovery. It is the time, when economy is coming out of recessionary effects and policies have started working out. slowly, but progressively, demand increases and new jobs are created.

Recession, depression, and  recovery  are the phases where the expansionary policies are implemented. Policies such as lower rates, increase in money supply and quantitative easing take place. In contrast to it, expansion, cause high inflation rate and to curb it, contractionary policies are implemented. It involves higher rates, lower money supply and decreasing in government spending with increase in taxation. It brings economy into control and give it a regulated growth.