CA Foundation · Business Economics · Business Cycles
Which of the following is the most likely effect of the peak phase of a business cycle on prices and the use of productive capacity?
At the peak of a business cycle, demand is very strong, so productive capacity is almost fully used and shortages of labour and inputs push costs up. This creates inflationary pressure. Idle capacity, falling prices and high unemployment are features of the trough or recession.
- APrices are falling and capacity is largely idle
- BPrices are stable and unemployment is at its highest
- CCapacity is almost fully used and inflationary pressure builds upCorrect
- DInvestment is at its lowest and inventories are piling up
Explanation
At the peak, demand is very high, factories operate near full capacity and labour and input shortages push up costs and prices. Falling prices with idle capacity and heavy unemployment describe the trough or recession instead.
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