CA Foundation · Business Economics · Business Cycles
Which statement about the nature of business cycles is correct?
Business cycles are pervasive: a change in activity in one sector spreads to others through linkages in demand, income and employment, so the whole economy feels it. They are not limited to agriculture, to planned economies, or dependent on government orders to end.
- AThey are confined to the agricultural sector and do not affect industry
- BOnce a contraction begins, it ends only through government orders and never through market forces
- CFluctuations in one sector tend to spread to other sectors, so the cycle is felt across the economyCorrect
- DThey occur only in socialist economies with central planning
Explanation
Because sectors are interlinked, a fall in demand in one industry reduces incomes and orders elsewhere, so the movement becomes economy-wide. Cycles are characteristic of free-market economies, not just planned ones, and they affect industry as well as agriculture. Contractions can also end through market adjustments.
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