Question

Discuss the cause and effect variables that a Keynesian, Monetarist, and Neoclassical theory uses to explain business cycles. please discuss briefly each theory.

Answer 1

Business cycles refer to rise and fall in the economic activities. Following are different theories:

Keynesian theory: Keynes argues that fall in aggregate demand leads to the fall in the output and employment that causes the recession in economy. Thus expansionary fiscal and monetary policy will lead to rise in the employment and output. Thus aggregate demand is most critical factor.

Monetarist : monetarists believe that unnecessary tempring with monetary policy creates the economic fluctuations. Thus government intervention creates the economic fluctuations.

Neoclassical: neoclassical argue that full employment is general condition and businesses cycles are temporary and economic forces automatically restore equilibrium in economy. Flexible wage and price restore equilibrium in economy.