Question

2. Based on your answer in question 1, Explain the different sources and impulses of Economic fluctuation in the business cycle presented by these theories.

Answer 1

Business cycles are fluctuations in economic activity that an economy experiences over a period of time. It describes the rise and fall in output of goods and services in an economy. A measure often used to represent this is the rise and fall in the Gross Domestic Product (GDP). The stages in the business cycle include expansion, peak, recession or contraction, depression, trough, and recovery; in that order, although depression is not always reached on the way down.

The economic fluctuations which cause business cycles is caused by different impulses and sources like -

• Changes in interest rate, which causes the changes in investment, income and hence aggregate demand.
• Changes in house prices - A rise in house prices creates a positive wealth effect and leads to higher consumer spending. A fall in house prices causes lower consumer spending and bank losses.
• Confidence of the economic agents in the economy.
• Multiplayer effect- which further depends on Marginal propensity to consume (MPC) and Marginal propensity to save (MPS).
• Acceletor effect.
• Lending and financing cycles.

These are some of the sources of the fluctuations which create business cycle, but there are many other factors which also contributes in the business cycle.