What explains business cycle fluctuations?

What explains business cycle fluctuations?

Explanations by Economists John Keynes explains the occurrence of business cycles is a result of fluctuations in aggregate demand, which bring the economy to short-term equilibriums that are different from a full-employment equilibrium.

How does the government influence the business cycle?

Variations in the nation’s monetary policies, independent of changes induced by political pressures, are an important influence in business cycles as well. Use of fiscal policy—increased government spending and/or tax cuts—is the most common way of boosting aggregate demand, causing an economic expansion.

What are 2 factors that affect the business cycle?

main factors contribute to changes in the business cycle: business decisions; interest rates; consumer expectations; and external issues. When businesses increase production, they increase aggregate supply and help fuel an expansion. When they decrease production, supply decreases and a contraction may result.

What causes boom and bust cycles?

Three forces combine to cause the boom and bust cycle. They are the law of supply and demand, the availability of financial capital, and future expectations. These three forces work together to cause each phase of the cycle. In the boom phase, strong consumer demand is the leading force.

What is the difference between business cycles and business fluctuations?

Business cycles are systematic changes in real GDP, and business fluctuations are changes that occur on an irregular basis.

What are the 5 causes of the business cycle?

Causes of the business cycle

  • Interest rates. Changes in the interest rate affect consumer spending and economic growth.
  • Changes in house prices.
  • Consumer and business confidence.
  • Multiplier effect.
  • Accelerator effect.
  • Lending/finance cycle.
  • Inventory cycle.
  • Real business cycle theories.

How does government influence the economy?

Governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing. Governments directly and indirectly influence the way resources are used in the economy.

What can government policies do about the business cycle quizlet?

Economic expansions are defined as the periods between recessions. What can government policies do about the business cycle? Government policies can reduce the severity of the business cycle. The Great Depression and World War II both caused major deviations from trend GDP.

What factors contribute to business cycles?

Causes of Business Cycles

  • 1] Changes in Demand. Keynes economists believe that a change in demand causes a change in the economic activities.
  • Browse more Topics under Business Cycles.
  • 2] Fluctuations in Investments.
  • 3] Macroeconomic Policies.
  • 4] Supply of Money.
  • 1] Wars.
  • 2] Technology Shocks.
  • 3] Natural Factors.

What three factors affect business cycles quizlet?

Terms in this set (15)

  • Contraction.
  • Trough.
  • Expansion.
  • Peak.

What do you mean by political business cycle?

See Article History. Political business cycle, fluctuation of economic activity that results from an external intervention of political actors. The term political business cycle is used mainly to describe the stimulation of the economy just prior to an election in order to improve prospects of the incumbent government getting reelected.

How are Keynesian models related to business cycles?

Keynesian models do not necessarily indicate periodic business cycles but imply cyclical responses to shocks via multipliers. The extent of these fluctuations depends on the levels of investment, for that determines the level of aggregate output.

Which is the perfect hypothesis for the political business cycle?

The “perfect” political business cycle hypothesis would be a fall in the economy in the first 2 years after the election so as to paint a gloomy economic picture, but revive the economy thereafter so as to achieve a more rosy economy with low unemployment and low inflation.

How are the phases of the business cycle explained?

The business cycle model shows how a nation’s real GDP fluctuates over time, going through phases as aggregate output increases and decreases. Over the long-run, the business cycle shows a steady increase in potential output in a growing economy. The typical business cycle has four phases, which progress as follows: