Running head: ECONOMICS
1. What are primary phases of the business cycle?
There exist four stages of the business cycle. The first one is the expansion stage which is
an increase in economic undertakings in a country. It has characteristics of rising prices, reduced
rate of joblessness, and increased growth (De Grauwe, 2016). This duration starts from furrow to
peak. The next stage in this cycle is the peak which is the higher changing point whereby expansion
becomes contraction. The third stage becomes the contraction which is a reduction in the speed of
commercial undertakings. It has characteristics of reducing prices, decreased rate of growth, and
the increased rate of joblessness. The final stage is the trough which is the lowermost changing
point of the commercial cycle whereby contraction becomes expansion. This is at times referred
to as the recovery.
2. How does inflation affect the economy's level of real output?
Inflation is a situation in the economy with the characteristics of rising prices which in turn
reduces the buying power of the people (Friedman, 2016). This then makes companies generate
lower revenues since the people would not be willing to increase their purchases. The rate of
joblessness is also increased during this situation thereby reducing further the buying power of the
consumers. This situation also increases the challenges in financial planning since valuable
economic policies are usually disregarded. There is also the reduction in the savings as well
investment rates in a country during this period due to the rise in the interest rates. Therefore,
acquiring mortgages or normal loans becomes a challenge for the citizens and the market becomes
unpredictable. The productivity of the economy is inhibited by inflation as the ability to create
additional wealth is reduced.
3. Recessions seem to show up every so often and create economic hardship. One might
think that macroeconomic policymakers could tame the business cycle and