Which of the following statements is true about the causes of business cycle fluctuations?

• A. Business cycle fluctuations can be caused by changes in aggregate demand and aggregate supply.
• B. Business cycle fluctuations are unrelated to monetary policy.
• C. Business cycle fluctuations occur only due to changes in consumer preferences.
• D. Business cycle fluctuations are only caused by changes in government spending.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what business cycle fluctuations are — these are the ups and downs in economic activity, typically measured by changes in real GDP over time.
2. Step 2: Recognize that business cycle fluctuations can be caused by various factors that shift aggregate demand (AD) or aggregate supply (AS). Aggregate demand includes total spending by households, businesses, government, and foreign buyers, while aggregate supply represents total production at different price levels.
3. Step 3: Analyze the given options: fluctuations can result from changes in aggregate demand (like shifts in consumer spending, investment, government spending, or net exports) or aggregate supply (such as changes in resource prices or technology).
4. Step 4: Note that monetary policy can influence aggregate demand by affecting interest rates and money supply, so saying business cycles are unrelated to monetary policy is incorrect.
5. Step 5: Conclude that business cycle fluctuations are not caused solely by one factor like consumer preferences or government spending, but rather by changes in aggregate demand and aggregate supply, which encompass a broad range of economic influences.