Business Cycles Essay

756 words - 4 pages

Business Cycles

Business cycles are the "ups and downs" in economic activity, defined in terms of periods of expansion or recession. “Business cycles occur because disturbances to the economy of one sort or another push the economy above or below full employment. Inflationary booms can be generated by surges in private or public spending (Roomer, Christina D).” The phases of the business cycle are Prosperity Phase: Expansion or Boom, where an increase in production and prices occurs, and lower the interest rates. Recession Phase: from prosperity to recession, where produces a fall in prices and activity with an increase in unemployment and interest rates. Depression Phase: Contraction of economic, which usually begins by capital markets running into bank and corporate failures. Recovery Phase: from depression to prosperity (lower turning Point), which begins when the shares recover from falls in prices and income.
The Prosperity phase of a Business cycle is the highest point in the economic. It is also called the peak. At this point in the economy’s full employment, i.e., all persons in employment and production is at its highest level. Since no labor or production capacity remaining, there is no further economic growth. “The features of prosperity are high level of output and trade, high level of effective demand, high level of income and employment, rising interest rates, Inflation, Large expansion of bank credit, business optimism and high level of MEC (Marginal efficiency of capital) and investment (Brian Bass).” The level of production is maximum and there is a rise in GNP (Gross National Product). On the other hand, Recession phase is where economic activity becomes slower. At this stage production, investment, trade and employment, and the income of individuals, companies and the government are reduced, therefore, economic growth is negative. This recession can present severe and prolonged, leading the economy to a state of crisis. In effect business expansion stops, and the stock market falls.
The Business Cycle phase of Depression or crisis is the lowest point in the economic cycle. At this point it low levels of employment (unemployment) are presented, consumers do not have many resources to consume and therefore, there is no demand for goods and services in the economy. In depression, “there is underutilization of resources and fall in GNP (Gross National...

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