But wages, salaries, interest rates, rentals and taxes do not rise in proportion to the rise in prices. Since economies in the olden world were heavily dependent on agriculture, changes in climatic conditions due to sun-spots produced fluctuations in agricultural output. When infrastructure projec … ts are undertaken, there is requirement of labor when roads are built, construction labor is required , which leads to employment. At the Solar Minimum, the sunspot number is usually zero or some small number. Where this is not possible, seasonal employment for agriculturists has to be found in other occupations.
Some steps should be taken to check and control the monetary factors which aggravate business fluctuations caused by the business cycle. The rich people are not able to spend their entire income. The depression of 1929-33 is still remembered because of its great intensity which caused a lot of human suffering. Thirdly, it has been observed that fluctuations occur not only in level of production but also simultaneously in other variables such as employment, investment, consumption, rate of interest and price level. The banks withdraw loan from business Enterprises more business Enterprises fail. Most central banks use high interest rates as a way to fight inflation.
As a result, the poor workers lack income to purchase goods produced by the capitalist class resulting in under-consumption or over-production. This tax is so devised that people in higher income brackets are taxed at a progressively higher rate than those in the lower income brackets. This leads to further improvement in business activity. In the same way, during the period of depression the Central Bank can reduce the Bank rate to stimulate investment. In this way rising prices sustain expansion for some time. Construction of all types of capital goods, buildings, etc.
But under-consumption on the part of the workers due to low wages brings a fall in the demand for consumer goods. Whenever a business cycle appears in a country, due to its trade relations with other countries, these usually spread to other countries. Their success depends on the existence of an efficient and honest administration. Reduction in the supply of bank credit will cause the rate of interest to rise. Cash reserve ratio to be kept by the commercial banks is lowered enabling them to give more credit. No exact formula, such as might apply to the revolutions of the planets or of a pendulum, can be used to predict the duration and timing of business cycles.
It can be difficult to compare businesses in different markets using this measure, for example, a retail business may employ more people than a car manufacturer, but this does not mean the retailer is larger. During depression consumer and business become more pessimistic and their expectations about future are disappointing, therefore they are not willing to borrow from banks. As a result, money and credit are increased. Which statements best describe how governments respond to changes in the business cycle? Such as bank rate, open market operations, cash reserve ratio, statutory liquidity ratio, fixation of margin requirements, regulation of consumer credit, rationing of credit, morals suasion, publicity and direct action. It is thus, evident that a compensatory fiscal policy followed by the Government would help to maintain a constant circuit flow by bringing about stabilisation in the economy. During the boom and inflationary situation, government may increase its taxes and reduce public expenditures; this creates budget surplus and control inflation.
Thanks to subsidies, cost of production goes down. Competition and profits lead to overproduction and glut of commodities in the market and to fall in prices. They earn, and so they consume more. State control of private investment: If the govt. Government activity of late, has expanded so much that the government is now in a position to exercise a very great influence on the total volume of output in a country. Others reduce production and try to sell out accumulated stocks. It may lead to contrived shortages, ques and inequality in the distribution of goods.
Investment is encouraged which tends to raise the demand for bank loans. The producers can offer products at lower cost. Thus, when investment picks up as a result of new innovations, the economy revives and moves into the expansion phase once again. Monetary policy has thus an important part to play in curbing cyclical business fluctuations and contributing to economic stability. Many of these firms have to close down on account of accumulated losses. It refers to the phenomenon of cyclical booms and depressions. They lead to considerable expansion in economic activity by increasing the demand for consumer goods and further raising the price level.
Hence, it is essential to supplement the automatic stabilisers with discretionary policy to secure effective and lasting stability in the National Economy. Recession The atmosphere of over optimization of the previous phase is replaced by over pessimism. Prices fall and income will fall. According to Hayek, it is bank loans which lead to over-investment in capital goods industries relative to consumer goods industries that ultimately brings depression in the economy. Recession may be mild or severe. Other earlier economists also focused on changes in climatic or weather conditions in addition to those caused by sun-spots. There is a sharp reduction of production, mass unemployment, low employment, falling prices, falling profit, low wages, contraction of credit, a high rate of business failures and an atmosphere of all-around pessimism and despair.
The profit motive attracts new firms. With the capitalist producers lacking market for their goods, capitalist economy plunges into depression. Even today weather is considered important in a country like India where agriculture is still important. We briefly explain below various phases of business cycles. In this way, investment expenditure on new capital goods increases. Stabilization broadly means preventing the extremes of ups and downs or booms and depressions in the economy without preventing the factors of economic growth to play their role.