Business Cycle and Involuntary Unemployment

Business Cycle

Business cycle refers to the fluctuations in economic activity that occur over a period of time. It is characterized by alternating periods of expansion and contraction in the level of economic activity. The four phases of the business cycle are:

1. Expansion - A period of rising economic activity, characterized by increasing real GDP, low unemployment rates, rising incomes and profits, and increasing consumer confidence.

2. Contraction - A period of falling economic activity, characterized by declining real GDP, high unemployment rates, falling incomes and profits, and decreasing consumer confidence.

3. Trough - A period of low economic activity, characterized by low levels of real GDP, high unemployment rates, low incomes and profits, and low consumer confidence.

4. Recovery - A period of increasing economic activity, characterized by rising real GDP, declining unemployment rates, increasing incomes and profits, and increasing consumer confidence.

Involuntary Unemployment

Involuntary unemployment refers to a situation where individuals are willing and able to work at the prevailing wage rate but are unable to find employment. It is a situation where there are job vacancies available, but workers are unable to secure employment due to various factors such as lack of skills, geographical mobility, and discrimination.

Involuntary unemployment is a measure of the inefficiency of the labor market and the economy as a whole. It leads to a loss of output and income, as well as social costs such as poverty, crime, and social unrest.

Relationship between Business Cycle and Involuntary Unemployment

Involuntary unemployment tends to be higher during periods of economic contraction and trough phases of the business cycle. During these periods, there is a decline in economic activity, which leads to a decrease in the demand for labor. Firms tend to lay off workers, and there are fewer job vacancies available in the market.

On the other hand, during periods of economic expansion, the demand for labor tends to increase, as firms expand their operations and hire more workers. This leads to a decrease in the rate of involuntary unemployment.

Conclusion

In conclusion, the correct answer to the question is option A, expansion. During the expansion phase of the business cycle, the level of economic activity is high, and there is a high demand for labor. This leads to a decrease in the rate of involuntary unemployment. However, during the contraction and trough phases, the level of economic activity is low, and there is a decrease in the demand for labor, leading to an increase in the rate of involuntary unemployment.

Involuntary unemployment
high - contraction phase
less - expansion ( b coz there will be growing new employment opportunities)