Question

Terms of expectations-price flexibilty - potential sources of business cycle fluctiations.

Compare them in the traditional keynesian,new keynesian and real business cycle models.

Answer 1

Expectations are generally adaptive in nature. In theory of equilibrium, Keynes assumed expectations to perfectly reflect the actual scenarios. Short-term expectations originates internally while the long term expectations originates externally to the employment theory of Keynes General Theory. Expectations theory is widely used as a concept and technique in macroeconomics. It describes that individuals decisions are based on three major factors, i.e., rationality, information available and past experiences.
According to Keynes, wages and prices are not flexible. If wages decreases, unemployment will exist. Whereas, firms producing major items prefer to lower the production and lay off the workers and employers than reduce the price. The monopoly power of the firms usually allows them to act in this manner.
Business cycle is created by the supply and demand forces, movement of GDP, capital availability, and future expectations. The major causes for fluctuations of business cycle are, interest rates, change in prices of products as well as houses, multiplier and accelerator effects, etc. It contains various phases such as, expansion, contraction, peak and trough. As business cycle are the ups and downs in financial activities, it do affects the economic strategies and activities of a firm as well as economy in whole.