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CA Foundation · Business Economics · Business Cycles

Which of the following is an effect usually seen during the depression or contraction phase of a business cycle, as opposed to the boom phase?

During a contraction, falling demand leads to lower profits, unsold inventories piling up and rising unemployment. The other options (rising capacity utilisation, credit demand and investment) describe expansion or boom conditions, not a downturn.

  1. ARising capacity utilisation and falling unemployment
  2. BIncreasing bank credit demand and rising business profits
  3. CFalling profits, growing unsold stocks and rising unemploymentCorrect
  4. DRising investment and falling inventories

Explanation

In a contraction, demand weakens so firms accumulate unsold stocks, profits fall and they lay off workers, raising unemployment. The other options describe features of expansion or boom: high capacity use, rising credit demand, and rising investment.

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