How does the government affect 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.

Why is it important to study business cycle?

Understanding business cycles allows owners to make informed business decisions. By keeping a finger on the economy’s pulse and paying attention to current economic projections, they can speculate when to prepare for a contraction and take advantage of the expansion.

Why do governments intervene in markets?

Governments intervene in markets to address inefficiency. In an optimally efficient market, resources are perfectly allocated to those that need them in the amounts they need. Inefficiency can take many different forms. The government tries to combat these inequities through regulation, taxation, and subsidies.

Should the government intervene in the business cycle?

Without government intervention, firms can exploit monopoly power to pay low wages to workers and charge high prices to consumers. Without government intervention, we are liable to see the growth of monopoly power. Therefore government intervention can promote greater equality of income, which is perceived as fairer.

How does business cycle help the economy?

A business cycle is the periodic growth and decline of a nation’s economy, measured mainly by its GDP. Governments try to manage business cycles by spending, raising or lowering taxes, and adjusting interest rates. Business cycles can affect individuals in a number of ways, from job-hunting to investing.

How business cycle can tell us about economic performance?

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.

What is the role of the business cycle in government and private sector decisions?

The role of the business cycle in economics is to help private sector companies and governments understand how to make decisions. For example, the growth stage often leads to higher production output. Therefore, the business cycle in economics applies to other economies outside of the company’s home country.

What is the importance of business cycles and their relevance for firms?

Let us see the importance of business cycles and their relevance for firms. A business cycle will affect all the sectors of an economy. Similarly, it will also affect all sectors of a firm as well. Right from demand to supply to the cost of production every aspect will depend on the phase of the business cycle.

What are business cycles and trade cycles?

There are always ups and downs in the economic activity and output of a firm. These cyclic phases are known as business cycles or trade cycles. Let us learn a little more about the importance of business cycles. Every company must go through their share of ups and downs.

Why do the different phases of the economic cycle demand different actions?

So different phases of the cycle demand different actions from the firm. So if the economy is going through an expansion the management can make the strategic decision to expand the business or increase their output levels. But if the firm is in a trough then spending must be reined in and policies should be formed accordingly.

Why is it important to identify the current phase of business?

Right from demand to supply to the cost of production every aspect will depend on the phase of the business cycle. So the firm must be able to correctly identify its current phase. This will help them frame appropriate business and trade policies.