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Phases of the Business Cycle

Updated on November 4, 2009

Phases of the Business Cycle

1.              Prosperity. This is the peak of the business cycle. There is full employment, and the national output is at full capacity, or close to it. Price level tends to increase due to increasing demand for goods and services. Output can no longer be increased because productive resources are at full capacity or fully employed.

2.              Recession. Both production and employment fall. The price level is likely to decrease only if recession is of longer duration.

3.              Depression. Both production and employment are at their lowest levels. This is the valley of the business cycle. Under such condition, no private businessman is willing to invest because demand for goods and services is also at its lowest point.

4.    Recovery. Both production and employment rise towards
full employment. During this stage,price level may increase.

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