Business cycle

Topics: Monetary policy, Unemployment, Business cycle Pages: 9 (3159 words) Published: October 19, 2013
Discuss the phases of business cycle. Suggest Suitable Fiscal policy and monetary policy to overcome the recession in economy. Business Cycle -
A business cycle is also known as trade cycle. It implies wave like fluctuations in the level of economic activity, particularly in national income a, employment and output. It is a short term picture of the behaviour of real output in a private enterprise economy. Business cycle refers to upturn and downturn in the level of economic activity that extends over a period of time. The business fluctuations occur in aggregate variable such as national income, employment and price level. The variables nearly move at the same time and in the same direction. However they vary in duration and intensity. Cyclic fluctuations have the following features:

Wave line movements –
ocyclical fluctuations are wave like movements and are recurrent in nature ocharacterized by alternation of expansions( prosperity) and contraction ( depression) in economic activity oare repetitive and rhythmic

ocontains oscillating movements in the form of waves from peak to trough and trough to peak •Synchronic –
oEntire business of an economy acts like an organism
oAny happening on economic front affects the entire economy oAnd through the mechanism of international trade affects entire world oexample -The Great depression 1929
Cumulative –
oProcess of expansion and contraction is of cumulative and self-reinforcing in nature oMoves in same direction until external forces reverses its direction •Self-generating forces –
oIt can terminate the period of prosperity and start depression oCannot have definite period of prosperity or depression
Non identical –
oPeriod of trade cycle are not identical although they recur with great regularity •Not symmetrical
oPeak and trough are not symmetrical
oMovement from upward to downward is more sudden and violent than that from downward to upward oDownturn is sharp and steep
oIt is relatively narrow at its peak and flatter at its trough

Phases of business cycle:
A business cycle can be divided into four phases. They are shown in the fig 1.1 The phases are:
1.Expansion or prosperity or the upswing
2.Recession or upper-turning point
3.Contraction or depression or downswing
4.Revival or recovery or lower turning point
These phases are recurrent and uniform in case of different cycles. But no phase has definite periodicity or time intervals. A business cycle starts from trough or low point, passes trough a recovery and prosperity phase, rises to peak, declines through a recession and depression phases and again reaches a trough.

1)Expansion or prosperity or the upswing or peak or Boom -
The top of a business cycle is called Peak or Boom or prosperity phase. In the boom period, the overall business activity is rising at a more rapid rate. There is a rise in real output and incomes of the people. There is a rise in production, prices, employment, wages, interest rates, profits and in the volume of bank credit. The general mood of the businessmen is that of optimism and commercial. The industrial activity both speculative and non-speculative shows remarkable expansion. Construction activity gets a big boost. Share markets give good gains to the investors. Financial institutions tend to expand credit. In the words of Haberler. ‘‘Prosperity is ‘a state of affairs in which the real income consumed, real income produced and the level of employment are high or rising and there are no idle resources or unemployed workers or very few of either”. During prosperity period, there is a high level of demand for capital goods and consumer goods and services. Risky investments are undertaken by the entrepreneurs. Inefficient firms enter into the market and manage to survive. The high level of demand for the various inputs creates shortage of some of them. Inflation goes up. The economy becomes supply constrained. The state of...
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