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2. Theories of the Business Cycle

c. describe theories of the business cycle;

What is the neoclassical and Austrian theory of business cycles? These are both “self-correcting economy” theories.

What is the Keynesian School theory of business cycles? How is it different from the Neo-Keynesian school? - Keynesian school thinks that there is no “self-correction”, instead it is the changes in output and employment (not price changes) that restores equilibrium in the Keynesian model. - The Neo-Keynesian school assumes that the prices of most goods don’t change daily (sticky price, or menu cost), as the cost of changing prices may outweigh the benefits of changing prices. Therefore, markets do not reach equilibrium quickly

What is the monetarist school theory of business cycles? Monetarist school says the economy is self-regulating and it will normally operate at full employment if monetary policy is properly timed and the pace of money growth is kept steady. The quantity of money is the most significant influence on aggregate demand.

What is the real business cycle theory of business cycles? Real business cycle theory assumes that real shocks to the economy are the primary cause of business cycles.