Phases of Business Cycles: Business cycles have four phases-boom,recession and recovery. Aboom is an upswing in economic activity. Output, employment and price level rise during this phase. But, it cannot continue forever. A period of upswing causes a downswing. Thus a recession sets in. Recession is characterized by decline in output, employment and price level. If a recession is not checked at the right time, it becomes a depression. Depression is characterized by massive fall in output and employment and decline in prince level. Like boom, depression also is not permanent. The economy recovers from depression also is not permanent. The economy recovers from depression and output and employment expands. This is the period of recovery. Let us look at these phases in some details
Boom: Boom is period of business optimism. It is characterized by expansion of output, rising income, rising prices and expansion of trade, Business optimism leads to expansion of investment and increasing demand for labour and resources. Demand for labour exceeds the supply of labour causing a situation of over-full employment. Wages, prices, incomes etc .., rise in tandem.
Recession: Recession is characterized by business pessimism. It starts with crashes in the stock market and some business failures. Business failures lead to sharp cutback in investment. This along with business failures creates unemployment. Unemployment and falling incomes lead to deficiency of aggregate demand.
Depression: Depression is characterized by severe contraction in output, massive unemployment, widespread business failures, severe deflation and serious crisis of confidence. Depression are very rare. The last serious depression, known as the Great Depression, happened in the 1930s.
Recovery: Economics recover from recessions and depressions, Anti-recessionary monetary and fiscal policies are implemented to aid recovery. Monetary stimulates is provided by cutting interest rate and increasing the availability of credit. Fiscal stimulus is provided by increased public expenditure and employment generation. Taxes are cut to encourage.
