Question

Examine the link between the business cycle and the four macroeconomic objectives.

Answer 1

The macroeconomic objectives include full employment price stability balance of payment equilibrium and economic growth. Business cycle is the cycle of recession and expansion in which the economic activity increases or decreases in a cyclic manner. When the economy is expanding there is a move towards full employment but price is also increased. The exchange rate depreciates and the economy is out of balance of payment. Overall there is a high economic growth. Similarly when there is a recession in the economy the economic activity is slow which increases unemployment. Price level may decrease and the currency is appreciated, destabilizing the external balance again. This retards the economic growth. In this manner business cycle is associated with the macroeconomic objectives in the sense that the economic activities during a particular business cycle influence major macroeconomic variables.