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An increase in interest rates will cause people to purchase fewer products because they have nowhere to borrow money, where they can afford to return it to. This will cause a contraction. A decrease in interest rates will cause people to purchase more products because they have places to borrow money, where they can afford to return it to. This will cause an expansion.
Buisness Decisions
Demand Slump: The Snowball Effect Scenario: Ben & Jerry ice-cream sales decrease What will happen? 1. Less ice-cream will be produced by the manufacturers 2. Ice-cream tasters, makers, ice-cream machine operators and other occupations to do with the production of ice-cream work for fewer hours, some even become unemployed. 3. The company will stop making new ice-cream flavors and stop investing in new ice-cream producing machines. This will cause a decrease in the demand for machinery. 4. The machinery business will also let their workers work for less hours and even fire them. 5. All of the former workers have fewer demands. If many ice-cream businesses do what Ben & Jerry’s just did it could cause a contraction in the business cycle.
Changes in Interest Rates
New Technology Business decisions can also increase aggregate supply and cause an expansion. A new and improved piece of technology has been invented and it actually costs less to produce that the old piece of technology. The production company that makes this new piece of technology is productive since it costs very little to produce the technology, so the supply increases and the cost decreases. Businesses that need the new technology to produce their own products will buy the technology, so they can make their product at a cheaper price. Other businesses discover new products that can be made with this new technology. The businesses must then hire more workers to work with the new technology. If this happens to all of the businesses the aggregate supply will increase and the economy will go through an expansion.
When people are happy about the economy they are more likely to purchase goods and services this will improve the economy and cause an expansion. This is caused by an increase in aggregate demand. When people are not content with the economy at hand they are not likely to purchase goods and services so a contraction will occur. This is caused by an decrease in aggregate demand.
Consumer Expectations
External Issues
Why Do Business Cycles Occur?
