Business Cycle Theories A General Comparison - 1625 Words

Business Cycle Theories: A General Comparison Maria Sciarrino Niagara University ECO101HON Business Cycle Theories: A General Comparison Throughout history, economies have experienced times of high growth and low unemployment as well as times of little or negative growth and high unemployment. It is controversial whether or not these instances occurred from regular fluctuations in the market. These alternating up and down fluctuations typically occur over several years, with each individual cycle varying in length and intensity. These fluctuations are known as business cycles, which have four phases. When the cycle is at its peak, the economy is nearly at full employment and the economy is producing at or nearly at full†¦show more content†¦The differences and similarities of these four theories is the main focus of this paper. Real Business Cycle Theory (RBC) defines the business cycle as being driven by unexpected technology shocks which include any event that alters land, labor, capital, or technology. Positive real shocks, such as good weather, are said to cause an economic boom. Good weather has a positive effect on land which increases the production of agricultural goods. Negative shocks tend to cause a recession. For instance, a plague can wipe out a large portion of a population which decreases labor and, consequently, productivity falls. It is believed that disturbances from technological shocks will solve themselves quickly and return to equilibrium without government intervention. While Real Business Cycle Theory is considered a â€Å"supply-side† theory, each type of shock can also influence demand. â€Å"Shifts in technology influence both the supply of goods for a given level of inputs (work effort in particular), and the demand for goods through its effect on wealth and the labor/leisure decision† (Plosser, 1989, p. 57). This suggests that the initial shock, which increases or decreases productivity, will influence work effort and carry out to other sectors of the economy. RBC models are characterized by agents (firms or households) who make decisions using rational expectations with the intent of