The Economic Cycle Prosperity Prosperity Boom Boom Time x y Depression Depression Recession Recession Recovery Recovery Level of real output Growth Trend Figure . - - Monetary Economics feature and the ultimate result is unemployment. Interest prices, profits and wages are low. The agricultural class and wage earners would be worst hit.
Banking institutions will be reluctant to advance loans to businessmen. Depression is the worst phase of the business cycle. Extreme point of depression is called as “trough”, because it is a deep point in business cycle. Any person fell down in deeps could not come out from that without other’s help.
Similarly, an economy fell down in trough could not come out from this without external help. Keynes advocated that autonomous investment of the government alone can help the economy to come out from the depression. iv. Recovery: After a period of depression, recovery sets in.
This is the turning point from depression to revival towards upswing. It begins with the revival of demand for capital goods. Autonomous investments boost the activity. The demand slowly picks up and in due course the activity is directed towards the upswing with more production, profit, income, wages and employment.
Recovery may be initiated by innovation or investment or by government expenditure (autonomous investment). Summary Currency is created by the RBI and Union Government. Bank deposits are created by Commercial Banks and Co- operative Banks. The demand for money is determined by a number of factors such as income, price level, interest rate etc.
Glossary n Barter : The exchange of one good for another without the use of money. n Money : An asset that is generally acceptable as a medium of exchange n Supply of Money : It refers to the amount of money which is in circulation in an economy at any given time n Inflation : An increase in average level of prices n Deflation : A fall in average level of prices, the opposite of inflation n Disinflation : Process of reversing inflation without generating adverse effects.