Business cycles are periods of economic activity closely linked with each other. They occur due to macroeconomic factors such as budget deficits and financial crisis. They also reflect individual decisions made by entrepreneurs. The business cycle displays the long-term trend of growth and change in a nation’s economy. It is said that the business cycle is one of the most important indicators of the overall economic health of a nation. A good business cycle leads to greater output and employment, which result in rising living standards for average citizens.
Business cycles have influences on political decision making. For instance, during an economically booming business cycle, incumbent government usually gains an advantage because of being in an advantaged position economically. The incumbent government encourages tax cuts, lower interest rates and easy credit policies that lead to an increase in demand for products. During this phase, banks lend more money and financial institutions to get ready to participate in economic expansion, resulting in increased investment in infrastructure, technological advances and consumer goods.
At the end of the business cycle, the cycle starts to reverse, known as depression. During this stage, there are many signs of economic contraction, including falling interest rates and unemployment. The result is lower investment, fewer consumer goods available for sale and rising unemployment. The four stages of the business cycle all have different impacts on national income and state of the country’s economy. Although, the four stages of the business cycle have similar characteristics, it is advisable to keep a tab on the progress of each stage and use this information to determine the general direction of the economy.