Question

How to explain to introductory business students:

“the topic of the macroeconomic business cycle, how government policies and business strategies are used to combat the cycle (government) and how to compete successfully (business)”

Answer 1

The business cycle is the cyclical fluctuation of both expansion and the contraction. The business cycle always creates instability in the economy. At the time of expansion, the business activities depend upon the increase in output, employment, profit, saving and investment and all over instability prevails in the economy and wise versa at the time of depression in the economy. The first time the government role to correct the business cycle fluctuation is suggested by J.M Keynes.

For the government, the business cycle is corrected by using the tool of fiscal policy. The major tools for fiscal policy are expenditure and the taxes. At the time of the boom, the government can increase the level of taxes and decrease the level of expenditure and at the time of depression can increase the level of expenditure and decrease the level of taxes.

The government will reduce the recessionary gap(actual GDP less than the potential GDP) by using the expansionary fiscal policy. It means the lowering of taxes and increasing public expenditure. This helps to improve the aggregate demand in the economy. In the same way, to correct the inflationary gap(actual GDP exceeds the potential GDP) by using the contractionary fiscal policy. It means that reducing public expenditure and increase the rate of tax. It will reduce the aggregate demand in the economy.