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Q1 What is a business cycle? Describe the different phases of a business cycle.

Ans:Business Cycle Business Cycle is waves of money and economic activity that forms a regular pattern, defined in terms of periods of expansion or recession. During expansions, the economy, measured by indicators like jobs, production, and sales, is growing in real terms, after excluding the effects of inflation. Recessions are periods when the economy is shrinking or contracting. Business Cycle Index Business Cycle Index is the cycle component of economics variables, the basic facts of business cycle index, they can be used for forecasting the economy. The Index is particular model of the economy. Most economic series expand and contract with general business in Thailand. They do not, however, movein perfect unison with the cycle in overall activity. The composite indexes are essentially averages of separate data series that cover a broad range of the economy. As averages, they tend to smooth out a good part of the volatility of the individual series and are useful summary measures for business cycle analysis and forecasting. The reason the leading index is called "leading% because the index shows cyclical turning points before those in aggregate economic activity. The main value o f the leading index is in signaling that either the risk of a recession has increased or that a recession may be coming to an end. Time Series Analysis An indispensable tool in monitoring current economic trends today, time series analysis is an indispensable element in monitoring and forecasting economic trends. This tool permits to adjust the economic time series for influences damaging the detection of the medium to longterm trend of a series. Such factors occurring in the original data may be seasonal influences, calendar influences or other irregular values which may be caused, for instance, by strikes. Consequently, most analytical methods aim at decomposing the observed time series data into components. These are the trend cycle component reflecting the medium to long-term "basic trend", a seasonal component and a calendar component through which seasonally and calendar adjusted values can be determined, and a residual component. Turning Point

2. the economy is in an expansion. The determination of a peak date is thus a determination that the expansion that began. 4. is requires in two categories as the following: A recession is a significant decline in activity spread across the economy. Depression Phase : Contraction or Downswing of economy.The turning point is the dated that economy have been turn up or turn down activity. visible in industrial production. 3. Recovery Phase : from depression to prosperity (lower turning Point). or space of time occurrence on past cycle. most recessions are brief and they have been rare in recent decades. real income. Because a recession influences the economy broadly and is not confined to one sector. Identifying turning points in the economy. some cycle happened long duration but some cycle happened in short duration. a cycle is the stage of phase. Four Phases of Business Cycle Business Cycle (or Trade Cycle) is divided into the following four phases :1. Diagram of Four Phases of Business Cycle . A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. lasting more than a few months. form recession to expansion or expansion to recession. Between trough and peak. We waits for many months after an apparent trough to make its decision.The length of business cycles were not similar. It will not issue any judgment about whether the economy has reached a trough until it makes its formal decision on this point. Trough: A trough date will mark the end of the recession. and wholesale-retail sales. Peak: A peak marks the end of an expansion and the beginning of a recession. Prosperity Phase : Expansion or Boom or Upswing of economy. employment. because of data revisions and the possibility that the contraction would resume. its consisting of more related phases. Recession Phase : from prosperity to recession (upper turning point). measures of economic activity. Duration of Cycle : In business cycle term. An expansion is the normal state of the economy.

After the peak point is reached there is a declining phase of recession followed by a depression. it causes a rise in prices and profits. employment. This period is termed as Prosperity phase. High level of income and employment. 4. Explanation of Four Phases of Business Cycle The four phases of a business cycle are briefly explained as follows :1. High level of output and trade. A high level of MEC (Marginal efficiency of capital) and investment. the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to full employment of resources. . 3. income. This is also called as a Boom Period. High level of effective demand. There is an upswing in the economic activity and economy reaches its Peak. prices and profits. Prosperity Phase When there is an expansion of output. The features of prosperity are :1. there is also a rise in the standard of living. 6. 7. 5. 2. Rising interest rates. Inflation. Large expansion of bank credit. 8. Again the business cycle continues similarly with ups and downs. Overall business optimism.The four phases of business cycles are shown in the following diagram :The business cycle starts from a trough (lower point) and passes through a recovery phase followed by a period of expansion (upper turning point) and prosperity. Due to a high level of economic activity.

prices and profits. 3. Fall in income and rise in unemployment. 7. The features of depression are :1. there is under-utilization of resources and fall in GNP (Gross National Product). there are expansions and rise in economic activities. During the period of revival or recovery. In depression. income. prices and profits. 4. 8. The businessmen gain confidence and become optimistic (Positive). employment. 2. There is an . This increases investments. 6. Overall business pessimism. income. production increases and this causes an increase in investment. the overproduction and future investment plans are also given up. 4. causing a decline in prices and profits until the economy reaches its Trough (low point). The stimulation of investment brings about the revival or recovery of the economy. so credit also contracts. the economic activities slow down. The banks and the people try to get greater liquidity. 3. Decline in consumption and demand. Orders are cancelled and people start losing their jobs. The businessmen lose confidence and become pessimistic (Negative). There is a steady decline in the output.2. There is a steady rise in output. employment. employment. Fall in interest rate. Depression Phase When there is a continuous decrease of output. Fall in MEC (Marginal efficiency of capital) and investment. Generally. Recovery Phase The turning point from depression to expansion is termed as Recovery or Revival Phase. The banks expand credit. Expansion of business stops. Deflation. business expansion takes place and stock markets are activated. Recession Phase The turning point from prosperity to depression is termed as Recession Phase. prices and profits. 5. there is a fall in the standard of living and depression sets in. When demand starts falling. The increase in unemployment causes a sharp decline in income and aggregate demand. The aggregate economic activity is at the lowest. During a recession period. When demand starts rising. Fall in volume of output and trade. stock market falls. income. Contraction of bank credit. recession lasts for a short period. It reduces investment.

Ans:Meaning of Monetary Policy The term monetary policy is also known as the 'credit policy' or called 'RBI's money management policy' in India. The Central Bank of a nation keeps control on the supply of money to attain the objectives of its monetary policy." According to A. Some prominent definitions are as follows. and business expands. there is a deflation.G. income and aggregate demand. Such questions are considered in the monetary policy. production." From both these definitions. during the expansionary or prosperity phase. What is monetary policy? Explain the general objectives and instruments of monetary policy. From the name itself it is understood that it is related to the demand and the supply of money Definition of Monetary Policy Many economists have given various definitions of monetary policy. "A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy. Hart. Conclusion: . Revival slowly emerges into prosperity. "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy. Q2. Objectives of Monetary Policy . it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives.Thus we see that. Harry Johnson. there is inflationand during the contraction or depression phase. According to Prof. How much should be the supply of money in the economy? How much should be the ratio of interest? How much should be the viability of money? etc. and the business cycle is repeated. prices and profits start rising.increase in employment.

After the Keynesian revolution in economics. 1. 4. Price Stability : All the economics suffer from inflation and deflation. This increased investment can speed up economic growth. Both inflation are harmful to the economy. Let us now see objectives of monetary policy in detail :1. 6. the international community might lose confidence in our economy. The BOP has two aspects i. the monetary policy having an objective of price stability tries to keep the value of money stable. 5. while the later stands for stringency . It helps in reducing the income and wealth inequalities. the RBI has always aimed at the controlled expansion of bank credit and money supply. When the economy suffers from recession the monetary policy should be an 'easy money policy' but when there is inflationary situation there should be a 'dear money policy'. with special attention to the seasonal needs of a credit. The monetary policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability. The former reflects an excess money supply in the domestic economy. stability and social justice. many people accepted significance of monetary policy in attaining following objectives. 2. Rapid Economic Growth Price Stability Exchange Rate Stability Balance of Payments (BOP) Equilibrium Full Employment Neutrality of Money Equal Income Distribution These are the general objectives which every central bank of a nation tries to attain by employing certain tools (Instruments) of a monetary policy. In a nutshell planning in India aims at growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability. the 'BOP Surplus' and the 'BOP Deficit'. In India.e. 2. 7. Rapid Economic Growth : It is the most important objective of a monetary policy. Exchange Rate Stability : Exchange rate is the price of a home currency expressed in terms of any foreign currency. the investment level in the economy can be encouraged. 3. If the RBI opts for a cheap or easy credit policy by reducing interest rates. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. 4. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate.The objectives of a monetary policy in India are similar to the objectives of its five year plans. Thus. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. It can also be called as Price Instability. Balance of Payments (BOP) Equilibrium : Many developing countries like India suffers from the Disequilibrium in the BOP. 3.

If the monetary policy is expansionary then credit supply can be encouraged. Neutrality of Money : Economist such as Wicksted.10 to Rs. In simple words 'Full Employment' stands for a situation in which everybody who wants jobs get jobs.of money. A firm supplied 3000 pens at the rate of Rs 10. We know that the original price is Rs. According to them.22. etc.We see that the quantity supplied when the price is Rs. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. small-scale industries. So we have: Price(OLD)=9 Price(NEW)=10 Quantity Supply (OLD)=3000 Quantity Supply (NEW)=5000 .10 is 3000 and when the price is Rs. However it does not mean that there is a Zero unemployment. Q3. If the monetary policy succeeds in maintaining monetary equilibrium. This can prove fruitful for these sectors to come up. It could help in creating more jobs in different sector of the economy. It refers to absence of involuntary unemployment.22. money should play only a role of medium of exchange and not more than that. Therefore. Full Employment : The concept of full employment was much discussed after Keynes's publication of the "General Theory" in 1936. The change in money supply creates monetary disequilibrium. monetary policy can make special provisions for the neglect supply such as agriculture. 5. Find the elasticity of supply of the pens. However this objective of a monetary policy is always criticized on the ground that if money supply is kept constant then it would be difficult to attain price stability. Robertson have always considered money as a passive factor. 7.22 is 5000. and provide them with cheaper credit for longer term. monetary policy can help in reducing economic inequalities among different sections of society. Monetary policy can be used for achieving full employment. However in resent years economists have given the opinion that the monetary policy can help and play a supplementary role in attainting an economic equality. Next month. village industries. Equal Income Distribution : Many economists used to justify the role of the fiscal policy is maintaining economic equality. Since we're going from Rs. In that senses the full employment is never full. the monetary policy should regulate the supply of money. due to a rise of in the price to 22 rs per pen the supply of the firm increases to 5000 pens. then the BOP equilibrium can be achieved. 6. Ans:First we need to find the data we need.22. we have Quantity Supply (OLD)=3000 and Quantity Supply (NEW)=5000.10 and Price(NEW)=Rs. Thus in recent period. so we have Price (OLD)=Rs.10 and the new price is Rs.

we get: [22 .Quantity Supply (OLD)] / Quantity Supply (OLD) By filling in the values we wrote down.2) = .2 We have both the percentage change in quantity supplied and the percentage change in price. Now we need to calculate the percentage change in price. we get: [5000 . Calculating the Percentage Change in Price Similar to before.667 (This is in decimal terms. so we can calculate the price elasticity of supply. PEoD = (0.7%). It's best to calculate these one at a time. Final Step of Calculating the Price Elasticity of Supply We go back to our formula of: PEoS = (% Change in Quantity Supplied)/(% Change in Price) We now fill in the two percentages in this equation using the figures we calculated.Price(OLD)] / Price(OLD) By filling in the values we wrote down. but here that is not an issue since we have a positive value. In percentage terms it would be 66.To calculate the price elasticity. the formula used to calculate the percentage change in price is: [Price(NEW) .667)/(1.3000] / 3000 = (2000/3000) = 0. . we need to know what the percentage change in quantity supply is and what the percentage change in price is.667 So we note that % Change in Quantity Supplied = 0.56 Note :-When we analyze price elasticities we're concerned with the absolute value.10] / 10 = (12/10) = 1. Calculating the Percentage Change in Quantity Supply The formula used to calculate the percentage change in quantity supplied is: [Quantity Supply (NEW) .

it results from a loss in the potential revenue. An implicit cost is an indirect intangible cost. or it can be a one-off expense. like the electric bill. The implicit costs results if a person is willing to forego the satisfaction in the search of an activity and is not rewarded by money and in any other form of payment. the explicit costs represent the expenses of the hotel room and other costs. It begins and ends with foregoing the satisfaction and benefits. Give a brief description of a) Implicit and explicit cost b) Actual and opportunity cost Ans:a) Implicit and explicit cost Implicit Cost Implicit cost is a cost that is represented by the lost opportunity in the use of a company's own resources. In other words. then an explicit cost is incurred as the hired person would be paid the wages. Implicit cost is the cost that is associated with an action¶s tradeoff. Whereas the implicit costs indicates the tradeoff. or it can vary from time to time. i. Likewise.e. In case another person is hired to do the work. etc. wages.Q4. materials. The contractor must charge enough to cover both the implicit and explicit costs to make a profit. It represents the explicit cost. If a person does an extra work added to his or her work without an extra pay. Implicit cost is an important concept in determining the cost of completing projects. the salary that the employee could have earned if he had not gone for a vacation. Examples of explicit costs include salaries. For example if a contractor hires a plumber to complete a job. which is the actual cost of an activity and is related to a cost that is not recorded but is instead applied. Explicit costs are those costs which are in the nature of contractual payments and are paid by an entrepreneur to the factors of production [excluding himself] in the form of . An example of an implicit cost is Goodwill. Implicit costs cannot be traded and hence it cannot be counted in terms of money. if an employee goes on a vacation. it can be predictable. excluding cash. an explicit cost is called an outlay cost. Less commonly. Explicit Cost A direct expense that a business incurs in conducting an activity. then he/ she incurs an implicit cost. For example. An explicit cost can be recurring. like the rent. The implicit cost for some enterprises is the result of the total time taken by a person to complete the project and the value of that person s time. The implicit cost are the costs of an enterprise that does not require direct expenditure.

These are examples of explicit costs. school supplies. Milton Friedman. The concept of opportunity cost is one of the most important ideas in economics. expenses on row materials. People have to choose between different alternatives when deciding how to spend their money and their time. They are those costs that involve financial expenditures at some time and hence recorded in the books of accounts. do homework.. Opportunity cost includes both explicit and implicit costs. For example. The opportunity cost of an action is what you must give up when you make that choice.e. The opportunity cost includes both explicit and implicit costs. However. Oppurtunity Cost This concept of scarcity leads to the idea of opportunity cost. is fond of saying "there is no such thing as a free lunch. Implicit costs are costs that do not require a money payment. They can be exactly calculated and accounted without any difficulty. etc. fuel and other types of inputs. Actual Cost Actual costs are also called as outlay costs. powers. absolute costs and acquisition costs. everything has an opportunity cost. They can be estimated and calculated exactly and recorded in the books of accounts. books." What that means is that in a world of scarcity.rent. Another way to say this is: It is the value of the next best opportunity. costs that require a money payment. etc. There is always a trade-off involved in any decision you make. utility expenses and payment for raw materials etc. wages. Consider the question. . interest and profis. The amount that the student could have earned if she had worked rather than attended school is the implicit cost of attending college. i. these costs are small compared to the value of the time it takes to attend class. Implicit costs are costs that do not require a money payment. who won the Nobel Prize for Economics. How much does it cost to go to college for a year? We could add up the direct costs like tuition. Explicit costs are costs that require a money payment. They are the actual expenses incurred for producing or acquiring a commodity or service by a firm. wages paid to workers. Opportunity cost is a direct implication of scarcity.