Question

1. How do consumption and investment spending affect aggregate expenditures and output over the business cycle?
   
2. Which is more responsible for volatility - consumption or investment spending or both? Explain your choice.
   
3. How do government actions affect consumption and investment?

300 word response

Answer 1

as we know our national income is broadly divided into consumption and investment expenditure. these two factors affect each other and get affected by each other as well. in an economy investment expenditure creates employment opportunity and employment creates income, this way the income generation helps in effective demand in the market which further creates way for investment expenditure. this way the two affect each other and get affected as well. consumption expenditure pushes the aggregate demand and aggregate expenditure then aggregate demand pushes investment expenditure and output is being created. both consumption and investment spending are responsible for the volatility because if there is any emergency in the market, suddenly consumption spending of people fluctuates a lot , future expectation, new trends in the market and many other factors affect the consumption expenditure so consumption expenditure is also responsible for volatility. investment expenditure mainly based on the rate of interest and demand condition in the market so any changes in these factors affect the investment in the market and as we know none of the above factors are constant, investment spending is also responsible for volatility. government time to time changes its policies through intervention in the market. both monetary and fiscal policy are important tools that check volatility in the market. if government wants to boost the economy it cuts tax rate and increases spending and if it wants to reduce inflation it does the reverse. that way both consumption and investment gets affected in the economy.