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Phases of the Business Cycle

Phases of the Business Cycle

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Published by: Dynafrom on Dec 09, 2008
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Business cycle is divided into the major phases:
Expansion
-
Contraction
-
Expansion
Is the first part of an expansionary phase. Consumer confidence starts to increase a littlepeople start to replace small items such as clothes and small appliances. This results inbusiness starting to replace or increase their inventory levels. Businesses start to increasetheir output hiring more employees.
Unemployment is decreasing while inflation is occurring
Recovery
Is the second part of an expansionary phase. Consumer's confidence starts to increase at afaster pace buying more and more consumer goods. As businesses start to hire even morepeople national incomes rise an unemployment levels fall. People now start to buyconsumer durable goods such as cars, houses. Resulting in businesses to start increase theirconstruction levels on homes, factories and stores. Businesses now also start to buy newequipment and machines increasing their efficiency levels. This results in workers receivinghigher pay. Prices increase.
Unemployment levels fall approaching full employment, inflation increases at very highrates
Boom
Occurs when expansion reaches a climax. Output starts to standstill and level off. Consumerconfidence starts to decline to the point where people start to stop their buying.
Peak
Is a period of increase in consumer confidence and economic activity. It is made up 3 smaller stagesknown as
-
Is the first part of a contractionary phase. Consumer's confidence starts to decrease alittle. People start to stop buying large items such as cars, major appliances andhouses. This results in businesses starting to reduce their output of these items(inventory levels). Businesses start to decrease their hiring they may even start to layoff some of their employees. Workers might have to take wage cuts. Resulting inprices going down.
Unemployment is increasing while inflation is dropping
Recession
Is the second part of a contractionary phase. Consumer's confidence starts todecrease at a faster pace buying less of all consumer goods. Now businesses have totry to get rid of their inventory levels on their shelves. Businesses decrease or slowtheir production levels to a very low level. Business try to cut cost so they start to layoff even more people national incomes fall as unemployment levels rises. This resultsin an even lower level of confidence in people. Resulting in even less buying. Pricesmust fall even lower; companies start to go bankrupt.
Unemployment levels increase approach Keynesian range, inflation becomes nonexistent prices start to fall
Depression
Contraction reaches a minimum. Output starts to standstill and level off. Consumerconfidence starts to level off at a low point to the point where people start to stoptheir savings, they have to buy a little.
Trough
Is a period of decrease in consumer confidence and economic activity. It is made up of 3 smallerstages known as
-
Contraction
Phases of the Business Cycle
December-03-089:01 AM
Unit 3 -Fiscal Policy Page 1

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