Beruflich Dokumente
Kultur Dokumente
Business Cycles
Lecture Plan
Introduction
Phases of Business Cycles
Concepts of Multiplier and Accelerator
Interaction of Multiplier and Accelerator
Causes of Business Cycles
Keynes’ Theory
Multiplier-Accelerator Interaction
Hicks’ Theory
Real Business Cycle Theory
Effects of Business Cycles
Controlling Business Cycles
Monetary Measures
Fiscal Measures
Chapter Objectives
Investment
Increase in Increase in
income induced Magnified
Increase in through the investment increase in
autonomous multiplier through the aggregate
Investment output and
accelerator
1 income
dY = dI
1− c It = v∆ Yt
Causes of Business Cycles
Explanations given to explain economic cycles:
Climatic changes such as sunspots that may cause
different moods.
Psychological aspects of entrepreneurs and consumers,
such as moods of optimism and pessimism.
Monetary phenomenon like changes in money supply,
rate of interest, etc.
Economic factors, such as over investment, under
consumption and over savings.
Shocks in the conditions under which producers supply
goods such as technological breakthroughs.
Keynes’ Theory
Keynes is credited with presenting a systematic analysis of
role of investment in causing business cycles
Economic fluctuations are due to changes in rate of
investment
Rate of investment depends upon:
rate of interest, which remains stable in the short run
marginal efficiency of capital ( MEC).
Keynes introduced the concept of ‘marginal efficiency of
capital’ (mec) to explain the expected rate of return on
investment.
marginal efficiency of capital depends upon
changes in prospective yield
supply price of capital goods which does not change in the short run.
Entrepreneurial expectations and the psychological aspect
of business that determine prospective yields.
Keynes’ Theory
Contd.