What are the different business cycle theories?
The various theories of the business cycle focus on the cause of fluctuations in macroeconomic activity. According to Keynesian theory, changes in the economic cycle are caused by normal events such as drastic change in consumer expenditure. The new classical theory, on the other hand, states that changes in trade cycles do not always result from a change in interest rates, but rather by changing the production of economics and consumers' preferences.
Trade cycles are usually defined as a period of economic growth or period of recession. Economic growth or expansion is usually characterized by sufficient employment, total higher market value of goods and services produced by the economy and increased productivity. Higher inflation rates can be observed at a time of rapid expansion, but do not necessarily occur during a period of growth. Productivity may decrease. The market value of Go economicods and services usually decrease because consumers tend to spend less. Speculation about loss of jobs or reducing income may stimulate teNdence to save more and borrow less.
The theory of the business cycle agrees that during the duration of the cycle there are peaks and troughs. Macroeconomic indicators such as unemployment rate, labor costs index, production capacity, commodity prices and changes in stock supply and productivity can be used to determine at what stage of the cycle the economy is. These indicators are used to predict where the macro economy is directed and to help identify trends. The working cost index is used to determine whether consumer prices will increase; Production capacity reveals whether the increase in demand will lead to inflation; And commodity prices can reflect inflation of raw goods. The inventory levels show the growth of demand, while the productivity of workers shows whether the goods and services are decreasing.
The two main types of business cycle theories are Keynesian and new models of classic thinking. Keynesian theory statesthat trade cycles can be caused by government policies, such as increasing or reducing money supply by changing interest rates. As one of the theories of the business cycle, it differs significantly from the new classical thinking in that there is room for flexibility in the economic environment. According to Keynesian theory, fluctuations in trade cycles occur as a result of an inflexible parameter, such as consumers' prices, which in turn leads to a drastic change in economic production.
The second of two theories of the business cycle, new classical thinking states that economic parameters do not always lead to a change in the goods and services of the economy. Just because consumer prices are shooting, it does not mean that consumption will drop. Demand changes do not directly affect the output, but the types of goods and services want to buy services.