AssignmentSet- 1 (60 Marks)Q1.What is business cycle? Describe the different phases of business cycle.ANSWER:BUSINESS CYCLES:Cyclical fluctuations have become a regular feature of a capitalist system. A capitalist economyis guided by competition and profit motive. There is freedom of private enterprise, privateownership of property and free play of market forces of supply and demand. Businessmen intheir anxiety to earn more and amass wealth, produce much in excess of the absorptioncapacity of the economy causing imbalances in the supply and demand conditions. Thus, thesmooth functioning of the economy is disturbed and subject to many ups and downs. Such upsand downs have been termed asbusiness cyclesCyclical oscillations are a part of the structure of a modern dynamic economy. They areperiodical changes in the level of business activities differing in intensity and changing in theircoverage. These fluctuations occur in a more or less regular time sequence. They arise in somesectors and spread over to entire economy. Some of these fluctuations are abrupt, isolated,discontinuous and catastrophic. Some are regular, continuous, persistent and mild, lasting forlong periods of time in the same direction. Some are rhythmic and recurrent in nature. Thus, atrade cycle is a highly complex phenomenon. It is associated with sweeping, violent and suddenfluctuations in economic activity. The duration of a business cycle has not been of the samelength. It has varied from a minimum of two years to a maximum of 10 - 12 years.The term business cycle refers to a wave like fluctuation in the over all level of economicactivity particularly in national output, income, employment and prices that occur in amore or less regular time sequence. It is nothing but rhythmic fluctuations in theaggregate level of economic activity of a nation.Phases of Trade CycleBasically, a business cycle has only two parts- expansion and contraction or prosperity anddepression. Burns and Mitchell observe that peaks and troughs are the two main mark-off pointsof a business cycle. The expansion phase starts from revival and includes prosperity and boom.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, abusiness cycle has five phases. They are as follows:.
