Question

Examine the fundamental causes of a nation’s business cycle fluctuations. Also, examine the relationship between total spending by government and consumers in a nation and the location of the countries’ GDP on the business cycle?

Answer 1

SOLUTION:-

Cause of fluctuations in nation business cycle:

• Employment level
• Money Supply
• Demand or Supply of goods
• Expectations about future
• Productivity level and Investment in capital

* Spending Multiplier = [1/(1 - MPC)] where MPC is marginal propensity to consume.

* Rise in government spending tends to raise total output in the economy by Spending multiplier * Government spending.

* If MPC is more than 0.5, rise inincome would be over than government spending which will raise criculation of money in the economy and money holding by people.

* Rise in money holding will raise conumption level and ultimateld raise aggregate demand in the economy. It takes economy to the expansionary staze of business cycle.

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