Question

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

causes of business cycle fluctuations-

1. FLUCTUATION RELATED WITH MONETARY POLICY-monetary policy creates high level of fluctuation and this is the most effective tool to control the level of inflation.high interest rates decrease the business investment and vice verse is also true.
2. FLUCTUATION RELATED WITH FISCAL POLICY-government policy can either increase the confidence of investor to boost up the level of economic capacity or it can  discourage the producers to produce
3. REACTION OF THE CONSUMER AND PRODUCERS-if consumers are confident then the marginal propensity to consume would be higher and thus the economy would develop but if people are under the threat of job insecurity and under the panic situation then they would save instead of consuming and thus the MPS would be higher and multiplier would be lower.
4. ECONOMIC SITUATION-if economy is facing any crisis then it would create heavy fluctuation and this would give rise to speculation and conflict concerned with the economy policies and decisions.
5. CHANGES CONCERNED WITH TECHNOLOGIES-if technical changes are positive and favorable to nation then it would give rise to positive fluctuation and if it makes adverse impact on the economy then it would leads to negative fluctuation in the economy.

relationship between business cycle and spending.

• when the economy is in expansion stage,then the government would reduce its spending because economy would be self reliant and thus the private sector would be playing important role.
• during the boom period government would decline its spending further and instead of incentive the government would impose taxes,in this situation the spending of public would be at its peak and there would be inflation in the economy.
• at the stage of recession the people would be saving more and more money instead of investing and there would be lack of consumption and therefore lack of production and thus there would be vicious circle of poverty exists.people would spend less and there would be unemployment in the economy.GDP of the country would fall.government would decrease the level of tax and provide incentives to the production sector.
• in the depression situation the economy would be in financial crisis and there would be lack of private investment and economy would be no more self reliant and thus the government would be the last resort of development.government would incur huge public spending in the economy and thus there would be increase in employment due to development work and then increase in consumption.
• in the recovery stage the government would keep providing incentives and public spending till the economy is at stability point.people would start increasing consumption as per their increase in wages.