Question

In: Economics

the following statement true, false, or uncertain? Justify your answer. . 1. Investment, employment and consumption...

the following statement true, false, or uncertain? Justify your answer.

. 1. Investment, employment and consumption are procyclical variables.

Solutions

Expert Solution

A Procyclical condition refers to a positive-effect on an economy, eg,. GDP growth (Gross Domestic Product). As the economy is on its high, the government expenditures are increased and tax burden is reduced.

While on the contrary a Countercyclical condition refers to a negative-effect on an economy, eg,. Unemployment. Under this situation, if the economy is on its peak, the government spendings are reduced and tax rates go higher.

Thus, the statement given above, regarding the particular economic variables which are :- Investment, Employment and Consumption is neither true nor false, but uncertain. As all the three variables can be both positive or negative at times, according to the economic condition of a country.

Say if an economy is on its boom then there will be more investment, resulting in generation of more employment and thus, fulfilling the consumption pattern of a country, which will be called a positive effect under a Procyclical condition .

On the opposite side, if an economy is on its boom and government expenditures are reduced, while taxes are increased, then there will be an automatic fall in investment side, which will result in unemployment and a fall in the rate of consumption too. Therefore, giving a negative economical effect under a Countercyclical condition.

Rahul Sunny answered 1 year ago
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