Business Cycle

Question 1

What are the four phases in the business cycle?

Answer 1

The four phases in the business cycle are the trough, peak, contractionary and expanding.

Question 1

Describe the characteristics of an economy in a contractionary phase.

Answer 1

• Rising unemployment, decreased inflationary pressures, low business and consumer confidence
• Expenditure declines as income decreases
• Investment falls as consumption declines and business failures increase.
• Interest rates fall as demand declines and inflation begins to moderate or fall.
• The whole economy begins to slow down.

Question 2

Describe the characteristics of an economy in an expansionary phase.

Answer 2

• Full employment and increased inflationary pressures due to the level of demand (expenditure)
• Excess of supply
• All resources including labour are fully employed resulting in high economic activity.
• High demand causes the prices of consumer goods and services to rise