The Four Phases Of The Business Cycle

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1. What are the phases of the business cycle?
- The business cycle consists of four main phases: peak, recession, trough, and expansion. The peak is the when the economy is at a maximum. Although the peak is temporary, the economy is at full employment, the output is very high, and the price level usually rises. After the peak comes the recession. Recession is a time where the economy declines and usually lasts six months or more. The trough is the lowest point of a recession. In this phase, employment and output are at their lowest level. After hitting the trough, an economy will bounce back. This is called the expansion phase. In this phase, the GDP, income, and employment all rise. In this phase, a rise in spending will occur and inflation
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Capital goods include the housing, commercial building, and heavy equipment industries among others. Capital goods are affected the most by the business cycle because if the economy goes into recession than firms will stop buying construction material and new equipment. This is because during times of recession they produce less, so they do not want or need to purchase new technology. This trend causes the economy to stop investing as much into the capital goods market. The same process happens to the consumer durables market. Consumer durables are products like automobiles, laptops, and refrigerators. When the economy goes into recession, households must limit their budgets and consumer durables are often not purchased. Families will work with the items they already have instead of buying new items. This causes less demand and thus the market takes a …show more content…
The first option is to increase government spending. An increase in government spending will lead to more aggregate economy demand and the real output will increase. The multiplier effect also plays a part as this initial investment by the government into the economy can lead to successive rounds of new consumption. This can lead to more production and more employment. The second option a government has is to cut taxes. Cutting taxes helps the economy by increase the personal incomes of households, and in turn increasing people’s consumption. The more people buy, the more will be produced, and the more the economy will employ. The third option the government has is to have a mix of the first two

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