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 fluctuation of business cycle may be cause by various factors such as

• consumption pattern of people
• political instability of the nation
• policies undertaken and their impact on the nation.

in general, there is a positive relationship between the government spending and the increased consumption of the people.for isntance when the public expenditure increases in the economy then the unemployment decreases and the level of income in the economy increases which is spent on various goods and services in the economy. therefore whenever there is an increase in the public expenditure in the economy the increased income leads to increase the consumption process.

the business cycle contains the following phases in the economy-

1. neutral - at this level the economy is generally at full equilibrium point and is in perfect stage.but this is a rare situation in the economy.this stage would pass very quickly and it shows a constant growth of GDP.
2. recession-sometimes the government's adverse policies and lack of demand creates unemployment in the economy and economy moves down from the earlier point and comes into recession.the GDP of the nation declines.
3. depression-when recession reaches to its lowest point then this is known as depression and the period of depression is generally depending on the efforts and steps taken by the government and central bank.if the plannings are favorable and effective there can be a V shape of recovery can be seen.depression is the worst phase of the economy due to increases NPA,deflationary gap,lack of investment and jobs.the GDP may be zero and negative.
4. recovery - after the government spending in the economy the employment increases and thus the icnome of the people and thus they spend it in the economy for the consumption purpose.the economy start recovery and reaches again at the neutral level and GDP shows a growth compare to the previous level.
5. boom- when there is an excess government spending and people continue to demand more and more goods and services then the economy is considered to be in Boom period.inflationary gap,over pricing,over full employment prevails in the economy.the GDP is all time high compare to the all previous level.