Business Cycle in Theory Essay

Business Cycle in Theory Essay

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The business cycle is a non-repeating cycle from expansion to recession of business activity that takes place around a rising trend that illustrates vast variety. Part of the business cycle consists of recessions, which begins when investment slows and recessions turn into expansions when investment increases (). From 1929 – 1933 the GDP fell 30% and the economy entered the Great Depression that lasted until WWII. Since 1945 there have been 10 recessions. In some ways the 1990’s were like the 1920’s, consisting of rapid economic growth and unprecedented prosperity (). There are several theories of the business cycle and all of them agree that investment and accumulation of capital play a crucial role. I will distinguish the different theories of the business cycle and describe the origins and the mechanisms of certain business cycle eras.
The first theory I would like to bring to attention is the Keynesianism aggregate demand theory, which stresses the role that the fiscal policy can play in stabilizing the economy (). This theory implies that higher government spending in a recession is the solution to helping the economy recovery quicker. The theory also implies that it is an oversight to wait for markets. More in particular, Keynesian fiscal expenses are directed more to offset households’ and businesses’ boost of savings during a recession.
“Keynes' general theory of money was written in the 1930s, when there was ample evidence of the failing of the free market to achieve full employment. Faced with this mass unemployment, Keynes advocated government intervention (higher government spending) to stimulate a depressed economy” (). The desire in the Keynesian theory is expected upcoming sales with anticipated upcoming profit...

... middle of paper ... frictionless perfectly competitive economies with generally complete markets subject to real shocks (random changes in technology or productivity), it makes the argument that cycles are consistent with competitive general equilibrium environments in which all agents are rational maximizes” ().RBC theorists found that the theory that GDP growth follows a random walk cannot be rejected. They argued that most of the changes in GDP were permanent, and that output growth would not revert to an underlying trend following a shock.

Works Cited The new classical and new Keynesian theories of the business cycle

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