business cycle theorymsci world ticker

Different schools of thought offer alternative explanations for cycles, often using different mathematical methods. Offers only a systematic framework for business cycles, not the whole concept.The economists of post-Keynesian period emphasized the need of both multiplier and accelerator concepts to explain business cycles. This implies when Marginal Cost (MC) is equal to Marginal Revenue (MR) and Average Cost (AC) is equal to price. This is termed as multiplier-acceleration interaction.Samuelson made certain assumptions for the explanation of business cycles. Therefore, theories developed by these traditional theorists are called monetary theory of business cycle. They linked economic activities with the Say’s law, which states that supply creates its own demand.

The equilibrium growth rate can be obtained with the help of rate of autonomous investment and voluntary savings. This implies that the investment at every level and for every product in the whole economy is equal. Fails to explain the reasons for linear consumption function and constant multiplier. Consequently, the prices of products increases. Assumes that businessmen are more sensitive to the interest rates that is not true rather they are more concerned about the future opportunities.Monetary over-investment theory focuses mainly on the imbalance between actual and desired investments. Hicks’s Theory. On the other hand, it decreases due to various reasons, such as decrease in prices, increase in costs, and inefficiency of the production process.According to Keynes theory, in the expansion phase of business cycle, investors are positive about economic conditions, thus, they overestimate the rate of return from an investment. Apart from this, when banks start supporting industries for investment by lending money at lower rates, it results in an increase in investment.This may result in the condition of over­investment mainly in capital good industries. FF line expresses the full employment or the peak phase of economy, while LL line expresses the trough phase of an economy. This is applicable only in the situation of full employment. On the basis of this belief, investors take large amounts of money from banks.In addition, in this stage, customers perceive an increase in the durable goods in future and therefore, start purchasing goods at present by borrowing funds. As a result, the output and profit of organizations start increasing.However, after a certain point of time, profit shows decline with a decrease in output prices. Further, the income and employment level decreases and economy reaches to the phase of depression.Keynes has proposed three types of propensities to understand business cycles. Monetary Over-Investment Theory 3. The investment-saving relations are affected when there is an increase in investment opportunities and voluntary savings are constant.Investment opportunities increase due to several reasons, such as low interest rates, increased marginal efficiency of capital, and increase in expectations of businessmen. According to him, changes in an economy take place due to changes in the flow of money.For example, when there is increase in money supply, there would be increase in prices, profits, and total output. The ceiling on upward flow is a result of scarcity of resources required.

According to him, business cycles take place simultaneously with economic growth; therefore, business cycles should be explained in association with the growth theory.a. As a result, the profit from investments starts Calling due to the increase in the cost of investment and production of goods and services. Schumpeter’s Theory of Innovation 4. He also designed a model having two stages, namely, first approximation and second approximation.Deals with the effect of innovatory ideas on an economy in the beginning. On the contrary, the economic condition is reversed when the bank starts withdrawing credit from market or stop lending money.c.

Samuelson’s model of multiplier accelerator interaction was the first model that represents interaction between these two concepts.In his model, Samuelson has described the way the multiplier and accelerator interact with each other for generating income and increasing consumption and demand of investment. The demand for products and services exceeds the supply of products and services.This leads to inflation in the economy, which reduces the purchasing power of individuals. Apart from monetary factors, several non-monetary factors, such as new investment demands, cost structure, and expectations of businessmen, can also produce changes in economic activities.b.

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