Question

1. What are the 4 phases of the business cycle?

2. How long does a business cycle last?

3. What causes each phase?

4. How does the size of the multiplier relate to the size of the marginal propensity to consume?

5. Does this relationship have any relationship to economic policy?

Answer 1

1. The four phases of the business cycle are:

(i) Expansion - It begins at low point and characterised by increased economic activity.

(ii) Peak - In this phase, the growth rate of the expansion slows down and the economy is in the period of prosperity.

(iii) Contraction - It is followed by the peak and it is shown by a reduction in GDP. This phase is also known as recession.

(iv) Recovery - It is the phase where contraction reaches bottom i.e. trough and economy may be stagnant for a time before starting the next expansion.