Question

Explain one reason why business cycles exists. Discuss how this particular reason can explain the current financial crisis.

Answer 1

PAGE.NO:- 01 Jue: Explain one reason why business cycles exists. Discuss how this particular reson can explain the current financial crisis. Ans : Before Knowing the the reason behind Business cycle, it is very important & business cycle is. the existence of to know that what => Business cycles- A Business cycle refers to periods of expansion and Contraction. A peak is the high point following a period of economic expansion. A trough Vo is the low point following a period of economic decline. The recurring and flactuating economic activity that economy experience orer a long period of time. Normal growth rate econome da regale gregate economic achvity Expansion Contraction Expansion BUSINESS CYCLE

PAGE'N08-02 . the existence of business There cycle are many lactor behind such as :- - in cis - INTERNAL ACTORS :-(as Changes in Demand (6) fluctuation investment, (a) Macroeconomic policies, (d) Supply of money ☺ - EXTERNAL FACTORS :- (a) Wars, 16) Technology shocks, (c) Natural factors , (d) Population expansion But according to the great economist "Keynes" the change in demand is the biggest factor sehind the existence of Business cycle. He believed that a change in demand causes a change in the economic activities. When the demand in an economy increases the time start producing more goods to meet the demand. There is more employment, autput , income and more proft This will lead to boost in the economy. But on the other side more demand may also cause inflation. On the other hand, if the demand falls, so does the economic by lead to a best which if it continues activity. They may of time may even lead to depression in the economy => . we know it very well that imbalance are the fundamental cause of the in demand and sy supply global economic crisis

PAGE . No:-03 The Financial crisis has essentially caused an fall in aggregate demand IERAS P2 - Pr = ADI = AD₂ = V = Proeluet 1 Product a Aggregale Demond & Aggregate demand 2 (Real GDP) 0 Aggregate demand is fallen becauses rå Bonk lending decreased due to the credit crisis and shortage of bant funds. The shortage of bank lending has seduced investment and consumer spending both are components of Aggregate demand (AD 1 (i) The decline in economic growth has caused a decline in export and world Trade further reducing ( changes in demand 17 и соцака от or anneaes:Pе сомало «А»). w the initial fall in demand causes fall in output a rise in Unemployment. However , with hig Unemployment this causes lower spending and further falls in economic growth. - NOTE :- Current economic slowdown in India or financial crisis is the best example of fall in е емаи ( AD), aggregate Deme Thank you.