Question

Draw a diagram of the phases of a business cycle and label each phrase. Explain how the economy moves from one phase to another. Define recession and expansion.

Answer 1

Business cycle has four phases.

1. Expansion
2. Peak
3. Contraction ( recession )
4. Trough

• Expansion will be characterised with a higher level of employment, economic growth, and the production will be maximum with the given resources. Prices also rise in this phase. The standard of living of people is also very high.
• Peak is the highest point of the business cycle. It will be characterised with maximum allowable output. Employment will be at its peak.
• Recession also known as contraction, acts as a correction phase for the peak phase. It is characterised with unemployment, slow economic growth, etc. A fall in GNP is also experienced.
• Trough is the phase followed by the contraction phase. It is the lowest level of economic activity. Following this trough phase, an expansion phase will occur.