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Essay / Effects of Business Cycles - 1645
IntroductionIn general, the economy tends to experience different trends. These trends can be grouped together as the economic/business cycle and can contain a boom, recession, depression and recovery. An economic/business cycle (see Figure 1) is the periodic but irregular up-and-down movements of economic activity, measured by fluctuations in real gross domestic product (GDP) and other macroeconomic variables. Samuelson and Nordhaus (1998) defined it as "a change in total national output, income and employment, generally lasting between 2 and 10 years, marked by widespread expansion or contraction in most sectors of the economyā€¯. These fluctuations in economic activity generally have implications for employment, consumption, business confidence, investment and production. Theories and nature and causes of business cycle fluctuations The Keynesian approach This theory shows how the collaboration of the multiplier and the accelerator can lead to regular cycles in aggregate demand. Keynesians believe that economic activity is generally unstable and is subject to inconsistent shocks, usually causing economic fluctuations and attributed to changes in autonomous expenditures, particularly investment. The Keynesian approach is quite simple; higher investment will lead to greater increases in income and output in the short run. This means that consumers will spend part of their income on consumer goods. This will lead to a further increase in expenses. All else equal, an initial increase in autonomous investment produces a more than proportional increase in income. Increased income will lead to increased investment to meet the growing demand for production. Keynesians also emphasize that because the instability of the economy is inconsistent, the government must intervene to make the economy stable when necessary. The Monetarist Approach This approach was developed by M. Friedman and AJ Schwartz in their classic study A Monetary History of the United States, 1867-1960 (1963). The monetarist approach attributes economic instability to fluctuations in the money supply influenced by authorities. In such a situation, the economy will moderately return to its normal level of production and employment. They clearly indicated that changes in the rate of monetary growth give rise to short-term fluctuations in output and employment. Therefore, in the long run, the trend rate of money growth only causes movements in the price level and other normal variables. They also attribute the business cycle to the expansion and contraction of money and credit. Their view was that monetary factors are the main source of fluctuations in aggregate demand..