Question

8. The discussion of the phases of the business cycle frame these cycles as periods of rising real GDP and periods of falling real GDP. What are the four phases of the business cycle? 9. Define inflation and deflation and explain what happens to both the borrower and the lender in a period of rising inflation.

Answer 1

8. A business cycle has four distinct phases - expansion, peak, contraction and trough.

Expansion- During this phase an economy experiences increase in real GDP, employment and economic growth.

Peak- During this phase an economy operates at the highest point on it's business cycle. The economy in this phase produces maximum allowable output, i.e. real GDP happens to be at maximum and employment is above or at full employment.

Contraction- Following the peak, an economy enters contraction phase. During this phase, real GDP falls, economic growth slows down, and employment declines, unemployment increases.

Trough: The slowing stops at trough phase. During this phase, the economy operates at the bottom point on business cycle. Real GDP in this phase is at it's lowest and after this phase the economy experiences expansion again.