Question

Consumer spending (C) is often a leading indicator of future short-run output (Y): It’s a “forward looking” variable.

a. How does Real Business Cycle Theory explain this fact?

b. In this theory, does current C cause Y? If so, how? If not, why not?

c. How does Keynesian Business Cycle Theory explain this fact?

d. In this theory, does current C cause Y? If so, how? If not, why not?

Answer 1

Forward looking term used to identify predictions about future business conditions. Consumer spending (C) is often a leading indicator of future short-run output (Y).

A) Real business-cycle theory is a macroeconomics models explain business-cycle fluctuations to a large extent can be accounted. Business cycle fluctuates and responds as the efficient to exogenous changes in the real economic environment. RBC theory claims that business cycle arise due to changes in real factors, instead of monetary factors, in the economy. This theory assumes markets are always in equilibrium, always clear, even during recessions and depressions.

B) In Real Business Cycle Theory Consumer spending (C) don’t cause future short-run output (Y). According to Real-business-cycle theory the economy obeys the classical dichotomy nominal variables are assumed not to influence real variables. Real-business-cycle theory explains the fluctuations in real variables emphasis real changes in the economy, such as changes in fiscal policy and production technologies. It excludes the nominal variables to explain economic fluctuations.

The supply of output depends on the supply of labour means that the greater the number of hours people are willing to work, the more output the economy can produce.

C) Keynesian business cycle theory explains the total spending in the economy and its effects on output and inflation. Keynesian business cycle theory explains "demand-side" theory that focuses on changes in the economy over the short run. If the aggregate demand fell it results weakness in production and jobs would precipitate a decline in prices and wages and vice versa. Keynesian model gives major role to expectations. Business cycles are periodic fluctuations of employment, income and output explains fluctuations in aggregate demand leads the economy to come to short run equilibrium at levels that are different from the full employment rate of output.

D) In Keynesian Business Cycle Theory Consumer spending (C) cause future short-run output (Y). Total spending in the economy affects the output and inflation. Keynesian Economics explains aggregate demand is influenced by many economic decisions like public and private, wages, Prices respond slowly to changes in supply and demand. According to Keynes's theory government spending leads to added business activity and spending. Spending leads and boosts aggregate output and generates more income. If consumers are willing to spend their extra income it results the growth in the gross domestic product could be even greater than the initial stimulus amount.