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

Nations go through periods of expansion and contraction ( also known as business cycle fluctuations ) due to varied resons.

Following are the fundamental causes of a nation's business cycle fluctuations:-

( I ) Changes in technology or productivity may cause business cycle fluctuations. If the change is positive it leads to expansion in the economy and vice-versa. For example, due to modern day industrialization, output in the nations have increased drastically leading to periods of boom and prosperity.

( II ) Level of employment may also cause business cycle fluctuations. Sudden fall in employment due to the great depression of the 1930s led to steep fall in output across countries especially, the US.

( II ) Other factors which may cause business cycle fluctuations are changes in aggregate demand and aggregate supply of the economy, and sudden change in interest rate.

Total spending by consumers and the government is an important determinant of aggregate demand in an economy. If the total spending increases it leads to positive change in aggregate demand.

Therefore, when the total spending of consumers and businesses in a country increases, it shows that the business cycle of the country is expanding and when the total spending decreases, it shows that the business cycle of the economy is going through contraction.