The Nature of Economic Instability

The Nature of Economic Instability 

Economic activity is constantly changing as leakages and injections fluctuate. In all contemporary markets, there is a long-term trend of rising production, income and expenditure, but there has not been a steady yearly increase in economic activity. Rather, economic activity is unstable by nature. It proceeds in irregular stages, with economic upswings followed by much slower periods of economic activity. The pattern of fluctuations in the general level of economic activity is known as the trade or business cycle.

The role of the government is to reduce the amplitude of the trade cycle. This means it tries to stop excessive highs and lows.

To understand why macroeconomic instability occurs, it is important to understand the nature and influences on aggregate demand and aggregate supply.