Question

1) What does the Austrian School of Thought say causes business cycles?

2) What does the Real Business Cycle Theory say causes business cycles?

3) How is the Real Business Cycle Theory different from the Keynesian school of thought?

4) How is the Austrian School of Thought different from the Monetarist school of thought?

5) What are the strengths of the Neoclassical Schools of Thought?

6) What are the weaknesses of the Neoclassical Schools of Thought?

Answer 1

1)Distortion in interest rate due to the attempt of the government to control money causes business cycles according to the Austrian school of thought.If by the intervention of the government interest rates are kept high or low misallocation of capital occurs.

2)Business cycles are the natural response of the economy to economic environment according to the real business cycle theory. Business cycles are caused by real or supply side shocks that involves changes in technology.So business cycle fluctuations are caused by real shocks.

3)Keynesian school of thought believes that government should increase demand to bring growth and so consumer demand is the most important driving force to increase growth. So this theory is in support of expansionary fiscal policy..Real business cycle theory does not support Keynesian theory.According to real business cycle theory,   business cycle fluctuations are caused by real shocks.

4)Monetarist takes into account statistical corelation between money supply and national income.On the other hand the Austrian theory of money makes all claims redeeemable at par on demand.

5)It assumes self interest is the guide for all our behaviours, criminal and other behaviour.It uses market forces to determine how internal and external market conditions influence crime.

6)Problem of growth and development of the economy were ignored and importance was gives only to micro economic analysis.The function of aggrgate demand was ignored and decided that only supply can affect demand..