Explain the different phases of a business cycle

Explain the different phases of a business cycle

Note: Please provide a neat diagram to explain your answer in each question. You are required to answer each question as follows:

  1. Give an introduction to the question and explain all key terms
  2. Give a graft, label the axes properly and identify all the curves
  3. Give a brief description of the changes and outcomes as indicated by the graf

Question No. 1

The consumption function may be represented in the following relationship:

Where C: consumption spending

a: autonomous consumption spending

b: MPC

On the graft below, draw the consumption function: C=$20+0.9 (Disposable Income).

Consumption is $billions per year.

Disposable income is $100 billion per year.

Answer the following questions:

  • At what level of income do households begin to save? Indicate the point on the graph with the letter A.
  • By how much does consumption increase when income rises $150 beyond point A? Indicate this new level of consumption with point B.

 Question No. 2

Defined as the natural rise and fall of a country’s economic growth over time, the business cycle is considered a useful means for analyzing an economy.  In the light of the above statement:

  1. explain the different phases of a business cycle
  2. explain how both inflation and unemployment contribute to the fluctuation of the business cycle.

 

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