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Chapter 12: Problem 3

If the initial peak of a business cycle was January \(1,\) year \(1,\) the trough was July 1 , year 2 and the final peak was July \(1,\) year \(4,\) how long was the contraction (in months)?

Short Answer

Expert verified
The contraction phase of the business cycle lasted for 18 months.

Step by step solution

01

Identifying Time Points

Initially, the exercise provides three major points in the business cycle: the initial peak (January 1, year 1), the trough (July 1, year 2), and the final peak (July 1, year 4). The contraction phase lies between the initial peak and the trough.
02

Calculating Duration of Contraction

To find out the duration of the contraction, calculate the time difference between the initial peak and the trough. Both events happen in different years, so the duration calculation must be separated into years and months. From January 1, year 1 to January 1, year 2 is one full year, which is 12 months. Then from January 1, year 2 to July 1, year 2 is another six months. Therefore, the total duration of the contraction period is 12 months plus 6 months.
03

Summation

Add up the time calculated in months from Step 2. The total duration of the contraction period is 12 months (from January 1, Year 1 to January 1, Year 2) plus 6 months (from January 1, Year 2 to July 1, Year 2). Therefore, the contraction period is 18 months in total.

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