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Discuss in detail the new economic paradigm in smoothing out business cycles - NSC Economics - Question 5 - 2024 - Paper 1
Question 5
Discuss in detail the new economic paradigm in smoothing out business cycles. How can an increase in economic activity impact businesses?
Worked Solution & Example Answer:Discuss in detail the new economic paradigm in smoothing out business cycles - NSC Economics - Question 5 - 2024 - Paper 1
Step 1
How can an increase in economic activity impact businesses?
Answer
An increase in economic activity typically leads to higher levels of consumer spending and investment in businesses, which can result in several impacts:
- Increased Demand: As economic activity rises, businesses may experience higher demand for their products or services. This can lead to increased production, which may necessitate hiring more employees to meet the demand.
- Higher Revenues: With increased consumption, businesses often see an improvement in their revenue and profitability ratios, enhancing their financial health.
- Investment Opportunities: Businesses may be more inclined to invest in expansion projects or new products, leading to innovation and potentially greater market share.
- Inflationary Pressures: However, if economic activity rises too quickly, it may lead to inflation as demand outstrips supply, influencing costs and pricing strategies for businesses. Thus, while increased economic activity generally benefits businesses, it must be balanced to avoid adverse effects.