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

Answer) Before looking at the causes,let us look at what business cycle is,an economy goes through a long run of boom or slow growth ,but in this long run,there are periods where economy experiences correction to main trend for short period,these business cycles are wrapped around long term trend,starting with expansion ,then reaching peak followed by contraction and then touching trough and then whole cycle repeats.Now coming to causes of these fluctuations,consider an economy which is in growth face for short term,demand is up,so is employment rate ,it continues growing till it reaches peak where inflation is too high and demand starts decreasing leading to increase in unemployment rate and economy starts contracting until it reaches trough where demand again picks up and cycle goes up,so these fluctuations occur owing to inflation rate,demand and supply(associated shortages and surpluses),unemployment rate,shocks to the economy like the one we are experiencing in form of pandemic,world impacting events and consumer and government spending.

We have already talked about importance and role of demand in business cycle in above points.Consumer spending and government spending is associated with demand only,a major cause of economy contraction is demand suppression leading to unemployment and further low demand,to overcome this consumer spending is required,at the same time government spends to stimulate growth by providing packages or incentives to corporates or potential industries,thus government and consumer spending lead to position of GDP at upper or higher end of business cycle.

Answer is complete.Thank you!