Question

Which of the following is a main economic variable that affects business cycles?

Answer 1

Answer:

C. interest rates

Step-by-step explanation:

Business cycle refers to the fluctuations of the gross domestic product (GDP) around its long-term growth trend.

The business cycle can result into a period of booms or recessions.

During a period of booms in the business cycle, there is a movement between periods of relatively rapid economic growth over a period of time. However, during a recession, there is a decline in economic activity.

Interest rate is one of the monetary policy that can used by the monetary authority, i.e. the central bank, to influence the business cycle.

During a period of booms, central banks usually raise the interest rates to prevent people from engaging in irrational economic activity that can result into a recession.

Also, during recession, the monetary authority can reduce the interest as an expansionary monetary policy to encourage investment that will increase the GDP growth and take the economy out of recession.

Therefore, the main economic variable that affects business cycles is interest rates.

Answer 2

C. Interest rates could be an economic variable that affect business cycles.