Question

Question 2 1. What is the "business cycle"? 2. Provide a visual representation of the business cycle and specify its phases 3. Which of the phases of the business cycle do you think the economy is experiencing if the following observations are made in the bond market. Explain your answers. a. Demand for bonds increases. Demand for bonds decrea c.Supply of bonds increases. d. Supply of bonds decreases. b. ses

Answer 1

2) 1) Business cycle refers to the fluctuations in economic activities which keeps recurring. There are 5 phases of business cycle:

boom,

recession,

slump/ trough,

recovery/ expansion,

recession

2)​

The phases of business cycle are marked on the diagram.

3) a)Demand for bond increases

During expansion of business cycle the income and wealth increases and demand for bonds rises shifting the demand curve to right. So demand for bonds rises during expansion.

b) Demand for bonds decreases.

During recession the demand for bonds reduces because the income and wealth od individuals is reducing. This leads to demand curve shifting to left.

c) Supply of bonds increases

During expansion the demand increases and the output is also increasing. Investors find this phase favorable for good investment opportunities and hence the supply of bonds increases shifting the supply curve to right.

d) Supply of bonds decreases

During recession the opportunities for investors reduces as the demand and overall output is falling. This shifts the supply curve to left and the supply of bonds is decreasing.

(You can comment for doubts)