Name; Mansoor Ahmed Assignment#2

Adm#2147113 Instructor; Sir Nasir Munir

BSAF-3A

Q;- What is business cycle?

Ans. Business cycle is the repetitive expansion of economic activities fallowed
by economic contractions. Economic growth is not an ongoing phenomenon pf
a recurring growth. It occurs in four phases i.e., Expansion, peak, contraction,
and trough. According to Keynes “The greater the spending of government
expenditure the greater the consumption of households consumption (Demand)
due to increase in government expenditure and hence the increase in growth but
it can be the other way around” The
policy makers adjust policies of
expansion (expansionary monitory
policy) fallowed by reducing interest
rates and contraction (contractionary
fiscal policy) by increasing interest
rates after overheating of economy.
In Pakistan currently there is a strict
contractionary fiscal policy after a
huge CAD because of our lower
diversity, our economy can’t sustain a persistent expansion which leads to CAD
(in Pakistan case)
The greater the diversity of economies the longer the business cycle i.e., US
economy will take 5 ½ years to complete a business cycle.

Q. What are factors which causes the business cycles?

Ans. Fallowing are the internal and external factors affecting a business cycle
1 Internal factors.
 Changes in Demand; According to Keynes multiplier the greater
consumption (Government expenditure) the greater the boom cycle of
economy but it can also causes demand pull inflation.

 Fluctuations in Investments; Fluctuation in investment is caused by

greater interest rates, entrepreneurial ability, profit expectation or legal
and security concerns.

 Macroeconomic Policies; macroeconomics policies also plays a role on

investment if it is investment conducive the economy is going to boom or
it going to be slowed down by conventional policies.

 Supply of Money; however money inflows propels economic growth but

over pouring leads to recession i.e., 2007-2008 crisis.

External factors.

 Wars. When a war happens the focus shifts from consumer goods to
capital goods i.e., Weapons, Tanks, Jets etc. the economy down turns

 Technology Shocks; Inventions of new technologies causes economic

growth faster and shifts the business cycle forward i.e., Technologies
adopted by countries that develops in the later 21st century are an example
of propels economic growth due to technological shifts

 Natural Factors; Natural factors like calamity, floods, discovery of

national reservoirs also affect business cycle.

 Population expansion: An abnormal growth rate in economy can create

problems in an economy
Q. How government policies effect the business cycle?

Ans. Government policies are the real trend setter of economic growth.
Government policies can control economic activity by increasing or decreasing
interest rates. i.e., reduces interest rate causes expansions in economic growth
and vice versa. Government policies can increase FDI by creating special
economic zones and tax-free zones. Government policies can enhance domestic
production by increasing taxes and levies on imports that can leads to CAD.
Government policies can increase exports by providing cheaper energy and
reduces taxes on exports. Government policies can help business setups a
smooth go by easing legal issues (EoDB). Government policies can sit external
issues like security, legal, land and other facilities requires for a business-
friendly environment.