Chapter 8, Problem 1RQ

To determine

The business cycle phases and turning points and explain the concepts of recurrence and persistence.

Explanation of Solution

A business cycle could be used in understanding the upward and downward movements in relation to the output of goods and services within an economy. It is normally presented in terms of the rise and fall of the gross domestic product in real value. It is the gross domestic product treated for inflation within the economy.

A business cycle consists of several phases or stages. Expansion being the first, suggests a rise in factors such as income, employment, production as well as sales. At a time of expansion debt would be paid on time by people. The money supply within the economy would be steady with booming investments. At the second stage which is called as the peak, the economy reaches the maximum level that could be reached. At this point, the price levels would be at their maximum with many economic indicators stop growing further. Restructuring economic operations start to occur at this stage as growth starts reversing. Recession is the third phase of the cycle. It is considered as a time of contraction in the economy. During such a time, economic indicators start showing adverse results such as high unemployment, slowdowns in production, sales drops and stagnant income levels. Following a recession, there would be a depression, which is the fourth stage. Here, economic growth would keep declining with rising levels of unemployment. Individuals and entities would face difficulties in securing credit. Trade levels would continue to drop with levels of bankruptcy increasing. As a result, the investment levels as well as consumer confidence would stoop down. The fifth stage would be named as a trough. This demarcates the end of the depression faced by the economy. It is considered as the stepping stone to the next phase of recovering. At the final stage, the economy start to heal itself or recover from the damage. The demand levels would go up as result of low prices. As production starts to rise again, so will employment levels. Lending would also take place at this stage. This would mark the end of the business cycle.

The concept of recurrence could be identified in a business cycle when there are contractions or expansions repeated. In other words, repeated contractions or expansions fall under the concept of recurrence as they occur over and over again. Persistence is another concept depicted by a business cycle. When economic activities face a situation of slowdown, if it continues to further decline, it would be a condition of persistence. On the other hand, persistence could happen at a time of expansion as well. If the growth trend of an economy keeps rising for a longer period of time, it would also be considered as a situation of persistence.

Economics Concept Introduction

Introduction: A business cycle is a curve of upward and downward movements depicting the operations of business organizations as well as economies at large. It is also called as the economic cycle and trade cycle. Through a business cycle, the production trends as well as the long term growth trends could be identified.