Question

The business cycle model shows short-term fluctuations in the level of economic activity along a long-term trend. Examine the two business cycle phases that can occur in a nation.

Item	Amount (AUD billion)
Household consumption	1029.81
Government consumption	340.92
Exports	386.39
Gross private domestic investment	352.69
Imports	386.95
Government investment	88.19

Answer 1

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Question:

Answer:

Data given in the question:

Item	Amount(AUD billion)
Household consumption	1029.81
Gross private domestic investment	352.69
Gross government spending	429.11
Net Export	-0.56

Explanation of current macroeconomic data and economic outlook:

According to this data, the government spending is higher than the gross private domestic investment. Household consumption is more than the combined gross private domestic investment and government spending. Net export is negative but size of difference between export and import is very small or nominal. So, trade balance is ok.

When spend more then its increase the aggregate demand (AD) in the economy and also boost production because of more consumption and development of socio-economic infrastructure.Aggregate demand is the total value of demand of goods and services at the different price level in a economy. AD is directly affected by consumption, investment, government spending and net export. When consumption, investment, government spending and net export its increase AD and increasing AD increase total output or growth rate and price level and vice-versa.

Expected business cycles phase -1:

So, here because of higher level of Consumption and investment and government expenditure will boost the AD and increasing AD will boost to the economic growth rate and inflation level. Here, the government expenditure is very high that will boost the AD and production both. So, increasing production will increase the aggregate supply in the economy and increasing aggregate supply (AS) will increase employment and income level. So these all these things will push the economy and economy will enter in the expansion phase. Expansion phase is a phase of business cycle. During the expansion phase the growth rate, employment rate, consumer confidence, income level, production and income level increase because of increasing AD and AS. There may be crowding effect but higher consumption level will manage it.

Expected business cycles phase -2:

Now, if the every things will be on the right path then in the long run the economy will enter in pic phase the economic growth will be at pic level or at full potential level that is also called saturation point. At the point these is no room or scope for further growth. Unemployment rate is very-very low or at natural level. Other side workers demand for more wages to compensate the high inflation rate. Now employers start firing.

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