Question

Examine the fundamental causes of a nation’s business cycle fluctuations. Also, examine the relationship between total spending by government and consumers in a nation and the location of the countries’ GDP on the business cycle?

Answer 1

The rise and falls in the economic activities or economic growth is called business cycles. The Following are the cause of business cycles:

• Change in the aggregate demand: Keynesian economists regard that change in the aggregate demand leads to the change in the economic activities, The fall in the aggregate demand leads to the economic recession while the rise in the aggregate demand causes the economic boom.
• Change in the productivity: The it is theory of real business cycle, where the change in the technology and productivity is behind the economic fluctuations or business cycles. The rise in the productivity brings about the rise in the growth rate of economy.
• Consumer confidence also affects the phase of business cycles. The positive confidence infuse the growth and rise in the economic activities.
• Monetarists argue that change in the money supply brings about the change in the business cycles.

The government spending and consumer expenditure are considered key factors influencing the aggregate demand and thereby affecting the business cycles. When government spending and consumer spending are low, the economy enters the recessionary gap where the output is below its potential level and larger uneployment rate is experienced in the economy.

On other hand, when there is over positive confidence in the economy, and government spending and consumer spending are high, economy faces the situation of boom and inflationary pressure.

Thus, the aggregate demand is most critical factor guiding the direction of business cycle.