Question

Describe the different theories of business cycle.

1) New Keynesian
2) Monetarist
3) Real Business Cycle

Answer 1

The different theories of business cycle are New Keynesian, Monetarist, and Real Business Cycle. New Keynesians believe in active policy intervention, Monetarists focus on changes in the money supply, and Real Business Cycle theorists emphasize market forces without government intervention.

Step-by-step explanation:

The business cycle refers to the short-term fluctuations of economic activity along its long-term growth trend. There are different theories that explain the business cycle:

1. New Keynesian Theory: This theory considers changes in aggregate demand as the cause of business cycle fluctuations. New Keynesians believe that policy makers should actively intervene to reverse recessionary and inflationary periods, as they are skeptical of the economy's self-correcting ability.
2. Monetarist Theory: This theory focuses on changes in the money supply as the main driver of business cycles. Monetarists argue that monetary policy should be used to stabilize the money supply and promote stable economic growth.
3. Real Business Cycle Theory: This theory attributes business cycle fluctuations to changes in the real factors of production, such as technology or labor supply. Real business cycle theorists believe that market forces alone can explain the ups and downs of the economy, and advocate for minimal government intervention.