Page 61 - FINAL CFA SLIDES DECEMBER 2018 DAY 5
P. 61
Session Unit 4:
LOS 17.c: Describe theories of the
business cycle., p.87 17. Understanding Business Cycles, p. 1
Neoclassic school/Supply side guys/Republicans
• AD/AS are primarily driven by changes in technology over time
• Economy has a strong tendency toward full-employment equilibrium –free markets?
Keynesian school/Demand side guys/Democrats
• Business expectations drive market -increase AD directly via monetary or fiscal policy!
• Wages ‘downward sticky’ so will not allow full absorption to return full employment
• New Keynesian school extends ‘downward sticky’ concept to all inputs!
Monetarist school
• Central banks poor policies provoke cycles – keep steady and predictable increases in
money supply!
Austrian school
• Cycles caused by government intervention e.g. forcing low interest rates cause too much
investment and speculative sectors, goes wrong and contraction kicks in! Govenment stay out!
New classical school
• Real Business Cycle Theory (RBC) emphasises variables like changes in technology and external
shocks –hands off as expansions and contractions are efficient market responses to external shocks!
