Reading 25: U.S. Inflation, Unemployment, and Business Cycles 2011, including, Business, business, between

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Session 6: Economics: Monetary and Fiscal Economics
Reading 25: U.S. Inflation, Unemployment, and Business Cycles

LOS g: Describe mainstream business cycle theory and real business cycle (RBC) theory and distinguish between them, including the role of productivity changes.

 

 

According to mainstream business cycle theory, business cycles are caused primarily by variations in:

A) aggregate demand.

B) productivity.

C) technological improvements.

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Mainstream business cycle theory states that business cycles are caused by changes in aggregate demand. If aggregate demand would remain steady over time rather than fluctuating, the magnitude of business cycles would be reduced greatly. Real business theory states that business cycles are due to fluctuations in worker productivity, which in turn is caused by the variability of technological changes.

 

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Which business cycle theory proposes that the growth rate of potential real GDP fluctuates over time?

A) Mainstream business cycle theory.

B) Both real business cycle theory and mainstream business cycle theory.

C) Real business cycle theory.

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Real business cycle theory proposes that potential real GDP fluctuates as worker’s productivity fluctuates. Mainstream business cycle theory states that the growth of real GDP will remain fairly stable over time.

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Which of the following business cycle theories proposes that only unexpected changes in aggregate demand causes economic cycles?

A) New Keynesian.

B) Monetarist.

C) New Classical.

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New classical economists believe that only unexpected changes in demand cause economic cycles. New Keynesian economists believe that both expected and unexpected changes in demand lead to business cycles. Monetarists believe that fluctuations in aggregate demand are due to the variability of the growth rate of the money supply.