Business Cycle

A business cycle is a pattern of fluctuations in economic activity characterized by alternating periods of expansion and contraction. The business cycle has four phases: expansion, peak, contraction, and trough. The typical business cycle is described as follows:

Expansion

During the expansion phase of the business cycle, there is an increase in economic activity, which is characterized by rising GDP, employment, and income. This phase is marked by optimism, confidence, and growth in business activity. Businesses invest in new projects, and consumers start spending more money.

Peak

The peak of the business cycle marks the end of the expansion phase and the beginning of the contraction phase. The peak is the highest point of economic activity, and it represents the point at which the economy has reached its maximum level of output. The peak is followed by a decline in economic activity.

Contraction

During the contraction phase of the business cycle, there is a decrease in economic activity, which is characterized by falling GDP, employment, and income. This phase is marked by pessimism, uncertainty, and a decline in business activity. Businesses cut back on investments, and consumers start spending less money.

Trough

The trough of the business cycle marks the end of the contraction phase and the beginning of the expansion phase. The trough is the lowest point of economic activity, and it represents the point at which the economy has reached its minimum level of output. The trough is followed by an increase in economic activity.

Which of the following describe a typical business cycle?

(a) Economic expansions are followed by contractions.

This statement accurately describes the typical business cycle. The expansion phase is followed by the contraction phase, and the contraction phase is followed by the expansion phase.

(b) Inflation is followed by rising income and unemployment.

This statement does not accurately describe the typical business cycle. Inflation can occur during both the expansion and contraction phases of the business cycle, and rising income is typically associated with the expansion phase, not inflation. Unemployment tends to rise during the contraction phase, not during inflation.

(c) Economic expansion is followed by economic growth and development.

This statement is partially accurate. Economic expansion is typically associated with economic growth, but economic development is a broader concept that encompasses not only economic growth but also social and political development.

(d) Stagflation is followed by inflationary growth.

This statement is not accurate. Stagflation refers to a situation in which there is both inflation and stagnant economic growth, which is not followed by inflationary growth. Inflationary growth typically occurs during the expansion phase of the business cycle.

Economic expansions are followed by contractions