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Growth is sustained increase in national output or GDP per capita of the country from one period

to another. For the sustained increase in GDP per capita the growth in productivity is necessary.
The growth in productivity can be achieved through increasing the skill of the labor, increase in
capital labor ratio, efficient allocation of scarce resources and sustained increase in technology
through research and development.

The business cycle is the fluctuation of the economic variables around their trend. There are two
phases of business cycle: recession and inflation. The recession occurs when growth rate of
economic indicators such as GDP, investment, unemployment, profits falls for two consecutive
quarters.

If left to market forces, recession can be proved to be prolonged and can hamper the economic
growth. The Great depression of 1930s is a burning example of market failure. The great
depression of 1930s give rise to the most important school of thought is economics, the
Keynesian school of thought. The Keynesian school of thought opposed the age long classical
notion that supply creates its own demand and because wages and prices are inflexible
downward, they fail to adjust to direct back the economy towards stable long run equilibrium.

According to Keynes the amount of spending determines the equilibrium rate of output in the
economy. The equilibrium in the economy will be achieved when total spending in the economy
equals to the total supply of goods and services in the economy. In this case, the inventories of
the business firms will be constant and they will have no incentive to change their level of output.
When the expectation of the people about the future state of the economy is pessimistic, they will
cut back their spending and producers will cut back their level of production.

The great depression of 1930 is the most severe economic downturn ever experienced by the US
economy. This era is marked by decade long high employment, falling GDP and difficult living
conditions. Even lower wage and near zero interest rate failed to generate enough demand to
push the economy towards its potential state. According to the Keynesian belief the pessimism
about the state of the economy prompted the consumer to cut back the level of spending.
Keynesian argued that the downward inflexible wages and interest rate will make cost to the
producers constant and they will cut back their production. Even when the wages fell, it
decreases the income of the consumer and decreases total spending. The lower interest rate
could not motivate the producers to take new investment project because of abundant excess
capacity in the economy. Hence, the economy dipped into the further recession and GDP fell well
below its potential rate while unemployment soared high.

According to the Keynesian thought the government must take an expansionary fiscal policy in
recession to direct the economy towards the potential equilibrium. The expansionary fiscal policy
is one in which the government either cut the existing tax rate or/and increase the government
spending. The decrease in tax or increase in spending increases the size of budget deficit. The
decrease in tax rate or increase in government spending increases personal income and
stimulate aggregate demand to set off a multiplier effect that generates enough spending to direct
the economy towards long run equilibrium. The increase in spending of the government also set
out a multiplier effect to increase the income of the economy and push the economy through long
run growth path.

Therefore, the recession is the argument for government policies to promote economic growth.

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