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Transcript
Theoretical Explanations for Cycles Ä Ä Many theories explain the causes for economic fluctuations illustrated by the business cycle. These differing theories appear in almost all economic discussions and are used to make predictions about the future direction of the economy. Karl Marx’s theory for fluctuations in the business cycle stemmed from his beliefs in class conflict between labor and capital. Marx believed that an unplanned economy was created by capitalists’ overproduction of goods, which created periods of excess supply. Any period of excess supply or excess demand will shift the equilibrium GDP and cause the economy to fluctuate. His solution was more government planning to regulate production. Austrian economist Joseph Schumpeter believed that entrepreneurs created economically destructive technology. The disorder and chaos that were created from new technological innovations were responsible for the ups and downs of the economy. John Maynard Keynes believed in a demand-driven economy and a business cycle based on spending in the economy. He proposed government spending should equal consumer saving. www.compasslearning.com Copyright ã 2006, Thinkwell Corp. All Rights Reserved. 1191.doc –rev 11/07/2006 New classical economists believe that the business cycle is a naturally occurring phenomenon, and no one should intervene. The new classical solution is to let the “law of the jungle” rule. Real business cycle theory holds that the economy is driven by the supply of real factors. Follow the chain reaction on the left as oil prices rise to the end result of recession. The real business cycle theory states that these changes in natural resources and technology are responsible for fluctuations in the economy. Monetarists believe that active control of the money supply causes the business cycle to fluctuate. Refer to the example above. Note that as the Fed tightens the money supply, the economy falls into a recession. The monetarist solution states that the government should not use monetary policy to regulate the economy. There are almost as many theoretical explanations for the business cycle as there are economic schools of thought. Economists’ explanations play a crucial role in economic studies and making predictions about the future of the economy. www.compasslearning.com Copyright ã 2006, Thinkwell Corp. All Rights Reserved. 1191.doc –rev 11/07/2006