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Strength of each phase is highly variable. A recession, for example, need not always entail serious and prolonged



Unemployment. Nor need a cyclical peak always entail full employment.

We begin with a cyclical peak where the economy is at full employment and the national output

Is also at, or very close to, capacity. The price level is likely to be rising during this cyclical phase,

the expansion of business activity is short-circuited. In the ensuing recession output and employment

Both decline, but prices in the economy tend to be relatively inflexible in a downward direction.

The price level is likely to fall only if the recession is severe and prolonged — that is, if a

“depression” occurs.

The trough of the recession or depression is where output and employment “bottom out” at

Their lowest levels.

Finally, in the recovery phase the economy’s levels of output and employment expand toward

Full employment. As recovery intensifies, the price level may begin to rise prior to the realization of

Full employment and capacity production.

Specific business cycles vary greatly in duration and intensity. Indeed, some economists prefer

to talk of business fluctuations, rather than cycles, because cycles imply regularity while fluctuations

Do not.

B) The reasons for the cyclic nature of economic development

Historically, economists have suggested a variety of theories to explain fluctuations in business





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