What causes the fluctuations of the business cycle?

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pohnpei397 eNotes educator| Certified Educator

Because the economy is such a complex thing, it is hard to know exactly why the business cycle happens.  There are many factors that are thought to cause these fluctuations.  Two of the most commonly cited causes are:

  • Fluctuations in investment.  As the economy expands, interest rates rise.  As this happens, businesses stop borrowing so much money to invest in new capital.  This causes a decline in GDP.  After the economy declines a bit, interest rates go back down and the economy grows again.
  • Political manipulation of the economy.  This theory holds that politicians interfere with the economy in order to be more likely to get reelected.  These actions tend to cause expansions.  After elections, they have to act more responsibly, reducing spending or the money supply.  This causes recessions.