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solved assignment 2014 MB0042- MANAGERIAL ECONOMICS Q1. Define the term Business Cycle and also explain the phases of business or trade cycle in brief.

Answer: Business cycles are an alternation of periods of prosperity and depression of good and bad trade. Such cycles consist of recurring alternations of expansion and contraction in the aggregate economic activity, the alternating movements in each direction being self-reinforcing and pervading virtually all parts of the economy.

Phases of trade cycle
Peaks and troughs are the two main mark-off points of a business cycle. The expansion phase starts from revival and includes prosperity and boom. The contraction phase includes recession, depression, and trough. In between these two main parts, we come across a few
other interrelated transitional phases. In its broader perspective, a business cycle has five phases. They are as follows.

1. Depression, contraction, or downswing
It is the first phase of a trade cycle. It is a protracted period in which business activity is far below the normal level and is extremely low.
Depression is a state of affairs in which the real income consumed or volume of production per head and the rate of employment are falling and are sub-normal in the sense that there are idle resources and unused capacity, especially unused labor.
2. Recovery or revival
Depression cannot last long. After a period of depression, recovery starts. It is a period wherein economic activities receive stimulus and recover from the shocks.

3. Prosperity or full-employment
The recovery once started gathers momentum. The cumulative process of recovery continues till the economy reaches full employment. Full employment may be defined as a situation wherein all available resources are fully employed at the current wage rate.

4. Boom or overfull employment or inflation
The prosperity phase does not stop at full employment. It gives way to the emergence of a boom. It is a phase wherein there will be an artificial and temporary prosperity in an economy. Business optimism stimulates further investment leading to rapid expansion in all spheres of business activities during the stage of full employment, and unutilized capacity gradually disappears.

5. Recession a turn from prosperity to depression
The period of recession begins when the phase of prosperity ends. It is a period of time during which the aggregate level of economic activity starts declining. There is contraction or slowing down of business activities. After reaching the peak point, demand for goods decline. Overinvestment and production creates imbalance between supply and demand.


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