Answer to Question #259984 in Macroeconomics for shon

Question

Draw a diagram showing the phases and turning points of a business cycle. Using the diagram, illustrate the concepts of recurrence and persistence

Answer 1

• Expansion phase- represented by the line of cycle that moves above the steady growth line. Under this phase, there is an increase in various economic factors such as production, employment, wages, output, profits, demand and supply of products and sales. Idle funds are utilized in investments.
• Peak phase- the expansion phase eventually slows down and reaches its peak. This phase is the stage in which increase in growth rate of business cycle achieves its maximum limit. Here, there is a gradual fall in demand of various products due to increase in the prices of inputs.
• Recession phase- this takes place when a decrease in demand for products becomes rapid and steady. All economic factors e.g production, prices, investment, savings starts to decline. The supply of products exceeds demand because producers are unaware of decrease in demand and they continue producing goods and services.
• Trough- economic activities of a country decline below the normal level. The growth rate of an economy becomes negative. There is a rapid decline in national income 
• and expenditure. This makes it difficult for debtors to pay off debts.
• Recovery phase- economy reaches lowest level of shrinking. This marks the end of negativism and the start of positivism. This leads to reversal of the process of the business cycle. Organizations stop laying off workers and they start hiring but in limited number.

The concept of recurrence is illustrated by the recurrent sequences of alternating phases of expansion and contraction in business activity.

From the business cycle, we may have persistent fluctuations resulting from effects on aggregate demand and profits that come up as a result of exogenous cyclical shocks.