CA Foundation · Business Economics · Business Cycles
Which of the following is the most likely effect on an economy during a prolonged downturn in the business cycle?
Cyclical unemployment rises in a prolonged downturn. Falling demand makes firms cut production and employment, so jobs are lost. Capacity utilisation, investment and tax collections generally decline during such a phase rather than increase.
- ARise in cyclical unemployment as firms cut output and hiringCorrect
- BRise in capacity utilisation across industries
- CIncrease in business investment in new plants
- DRise in tax revenue of the government due to higher incomes
Explanation
When demand falls in a downturn, firms reduce output and lay off workers, producing cyclical unemployment. Capacity utilisation, investment and tax revenue all tend to fall, not rise, in a downturn.
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