Which of the following best describes the nature of cause and effect in the context of the business cycle?

• A. Cause and effect in the business cycle are random and cannot be explained by economic theory.
• B. Changes in aggregate demand and supply can lead to fluctuations in output, employment, and prices over time.
• C. Only changes in consumer preferences drive the phases of the business cycle.
• D. The business cycle is solely determined by government fiscal policy decisions.

Answer: (B)

Verified step by step guidance

1. Understand that the business cycle refers to the fluctuations in economic activity over time, including periods of expansion and contraction in output, employment, and prices.
2. Recognize that economic theory explains these fluctuations primarily through changes in aggregate demand and aggregate supply, which represent the total demand and total supply in the economy.
3. Analyze how shifts in aggregate demand (due to factors like consumer spending, investment, government policy, and net exports) and aggregate supply (due to changes in production costs, technology, and resource availability) can cause expansions or recessions.
4. Evaluate why attributing the business cycle solely to random events, consumer preferences, or government fiscal policy alone is insufficient, as these are only parts of a broader set of influences captured by aggregate demand and supply changes.
5. Conclude that the best description of cause and effect in the business cycle is that changes in aggregate demand and supply lead to fluctuations in output, employment, and prices over time.