What causes the change in phases of the economic cycles?
What causes the economy to peak and fall, or hit a trough and bounce back.?
If economic growth and prosperity and increased demand lead to greater borrowing, more credit, more growth and prosperity, and more demand? shouldn't it just keep going up? or conversely down?
Why is borrowing today, causing less spending in the future to pay back the credit? if you had invested correctly in income generating assets, wouldn't your spending be able to keep increasing?
This is one of the current debates in macroeconomics. The question is whether the cycles that we see are endogenous (caused by the markets and the system itself) or exogenous (caused by factors outside the system like technological innovation).
Because you see, whichever one you believe has an incredible impact on your policy choices.
Exogenous: If the boom/bust cycle is the product of uncontrollable shocks, then we should just be hands off and let the market do its thing.
Endogenous: This is a more traditional Keynesian view, in which the boom bust cycle exists because of disequilibrium in aggregate supply (AS) and aggregate demand (AD). This is why Keynesians believe the government should step in using tools like monetary and fiscal policy to smooth out the cycle. By cooling down the economy when it's too hot, or by spurring demand when it's too cold, the hope is that we can bring the current levels of AS and AD closer to their long-run equilibrium
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