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solved assignments for Q3. Expansion or Prosperity or full employment level:


It is characterized by a very high marginal efficiency of capital, resultant increased investment, higher level of income, employment, expansion of book credit and higher margin of profits causes, accelerated economic development.

During the period of prosperity, an economy experiences:
·         A high level of output and trade.
·         A high level of effective demand.
·         A high level of employment and income.
·         A high level of marginal efficiency of capital.
·         Price inflation.
·         A rise in interest rate.
·         A large expansion in bank credit.
·         Firms operate almost at full capacity along with its production possibility frontier.
·         Spread of optimistic environment through the economy.
4. Over full employment level or Boom:
The prosperity phase does not stop at full employment. It gives way to the emergence of a boom.
This is the situation where all the resources including natural and human resources are optimally used.
During this phase:
  •  The prices, wages, interest, profit, move in the upward direction.
  • Marginal Efficiency of Capital rises leading to business expansion.
  •  Business people borrow more and invest. This adds fuel to the fire.
  • There is higher purchasing power and the level of effective demand will reach new heights.
  • There is an atmosphere of “over optimism" all round which results in over investment.
  • It is a symptom of the end of prosperity phase and the beginning of recession.
  • 5. Recession:
The period of recession begins when the phase of prosperity ends. Recession exits for a short period of time. Business pessimism during this period is characterized by feelings of hesitation, doubt and fear.
Recession refers to decline in economic activity and a persistent fall in the production caused by the inefficiency of income. It is also associated with a sharp drop in the price level. Recession relates to turning point rather a phase.

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