Financial Analysis

1924 WordsJul 25, 20128 Pages
Question 1 1.1 Business cycle The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. * Description of the 4 stages (i) Prosperity Phase: Expansion or Boom or Upswing of economy. When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase. Examples of the features of prosperity are high level of output and trade, high level of effective demand, high level of income and employment, rising interest rates, inflation, large expansion of bank credit and overall business optimism. Question 1 (continued) 1.1 Business cycle (continued) (ii) Recession Phase: from prosperity to recession (upper turning point). The turning point from prosperity to depression is termed as Recession Phase. During a recession period, the economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits. The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The banks and the people try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market falls. Orders are cancelled and people start losing their jobs. The increase in unemployment causes a sharp decline in income and aggregate demand. Generally, recession lasts for a short period. (iii) Depression Phase: Contraction or Downswing of economy. When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in. Examples of the features of depression are the fall in volume of output and trade, the fall in income

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