Question

Compare and contrast: Business cycle theory--Keynesian cycle, Monetarist cycle, new classical cycle, new Keynesian cycle, and real business cycle

Answer 1

The business cycle is the irregular and nonrepeating up and-down movement of business activity. The average recession lasts a bit more than one year

The Keynesian theory of the business cycle regards volatile expectations as the main source of economic fluctuations.

The Keynesian impulse is changes in the expectations of companies regarding future sales and profits. This shift is having an impact on investment. There are two elements to the Keynesian system. First, a shift in investment affects aggregate demand with a multiplier effect. Second, the supply curve for the short-run aggregate is horizontal. Money salaries respond asymmetrically; salaries do not drop as a reaction to declines in aggregate demand, but they increase as a reaction to aggregate demand rises. Therefore, in a recession, the economy can stay stuck.

The monetarist theory of the business cycle regards fluctuations in the money stock as the main source of economic fluctuation.

The impulse in monetarist theory is changes in the amount of money's growth rate. The currency system is changes in the pace of development of the amount of cash that shifts the AD curve. The economy is moving along a sloping curve of the SAS. Ultimately, cash salaries react to the price level change so that the SAS curve changes and the economy returns to potential GDP

A rational expectation is a forecast based on all available information. Rational expectations theories of business cycles focus on the rationally expected money wage rate. The two rational expectations theories are the new classical theory and new Keynesian theory.

Unanticipated modifications in aggregate demand are the impulse in the new classical theory.
Unanticipated changes in aggregate demand are the significant impulse in the fresh Keynesian theory, but expected changes also play a part.
The mechanism of rational expectations is an unexpected shift in the AD curve, moving the economy along its SAS curve as real wage levels change.

The new classical theory claims that only unexpected changes in aggregate demand have an impact on real wage prices and GDP.
The new Keynesian theory claims that labor agreements only slowly alter cash salaries. A shift in aggregate demand that was unforeseen when the labor contract was signed will impact real wages and GDP even if it has come to be anticipated when the incident actually happens.

The real business cycle theory (RBC) regards random fluctuations in productivity as the main source of economic fluctuations.

RBC theory's impulse is technological changes that influence productivity growth rates.
The RBC mechanism is a productivity shift that impacts demand for investment and demand for labor.
Both decline during a recession. The fall in demand for investment reduces the real interest rate, so the impact of intertemporal replacement reduces labor supply.