The fluctuations in real GDP

The fluctuations in real GDP

The fluctuations in real GDP often measure a business cycle, and it’s the period of the irregular up and down movement of economic activity. Variation in investment spending is one of the factors affecting the output of the business. An increase in investment leads to an increase in aggregate demand leading to economic expansion, while a decrease in investment leads to an opposite effect on the business cycle. When there is an economic downturn, there is less consumption since there is less money available for spending; hence the business experiences a negative effect on its output. Their incomes highly determine an Individual amount of consumed goods.

Investment spending is more responsible for volatility compared to consumption. Change in investment spending, either by decreasing it or increasing, will have an impact on aggregate demand that leads to economic expansion. Use is less volatile since investment spending has a higher sensitivity to consumer confidence and income. Moreover, the volatility of investment spending is a result of the contribution of investment to economic growth and is also a cause of business fluctuations.

Different actions undertaken by the government can affect consumption positively or negatively. For example, government policies affect the rates of interest, which can change borrowing costs. Lower prices will attract investments, while higher prices will keep off investors. Decreased consumer spending could also be as a result of high-interest rates. Fiscal policies were undertaken by the government to affect aggregate demand through taxation and government spending changes. These affect employment and household incomes of individuals, which then have a positive or negative impact on consumer spending and investment. Government monetary policy has effects on the supply of money in an economy, which influences inflation and interest rates.