In which phase of the trade cycle do the prices of factors of production increase?
Options
AExpansion
BPeak
CContraction
DTrough
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Business CyclesPYQ - Dec 2022Question 91 of 20
All Questions Correct Answer
✅ Option a — Expansion
All Options:
- AExpansion
- BPeak
- CContraction
- DTrough
Detailed Solution & Explanation
To determine the phase of the trade cycle where the prices of factors of production increase, let's break it down:
• The trade cycle consists of four phases: expansion, peak, contraction, and trough.
• During the expansion phase, there is an increase in economic activity, leading to higher demand for goods and services.
• As a result of this increased demand, businesses expand production, which in turn leads to an increase in the demand for factors of production such as labor, raw materials, and capital.
• This increased demand for factors of production causes their prices to rise, as businesses are willing to pay more to secure the resources they need to meet the growing demand for their products.
The correct answer is right because the expansion phase is characterized by growing economic activity and increasing demand, which drives up the prices of factors of production.
In contrast, the contraction phase is incorrect because during this phase, economic activity is slowing down, leading to decreased demand and lower prices for factors of production. The trough phase is also incorrect because it represents the lowest point of economic activity, where demand and prices for factors of production are at their lowest.
About This Chapter: Business Cycles
Paper
Paper 4: Business Economics
Weightage
5%
Key Topics
Phases, Features, Causes
Business Cycles describe the recurring fluctuations in economic activity — Expansion, Peak, Recession, and Trough. This chapter covers the phases, features, and causes of business cycles, along with theories explaining why economies go through regular boom-bust patterns.
View Official ICAI SyllabusExam Strategy Tip
This is a lower-weightage chapter but easy to score. Focus on memorizing the four phases and their characteristics. Questions are usually straightforward.
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