Page 63 - FINAL CFA SLIDES DECEMBER 2018 DAY 5
P. 63
Session Unit 4:
LOS 17.c: Describe theories of the
business cycle., p.87 17. Understanding Business Cycles, p. 1
Neoclassic school
• AD/AS are primarily driven by changes in technology over time
• Economy has a strong tendency toward full-employment equilibrium –free markets?
Keynesian school
• Business expectations drive market -increase AD directly via monetary or fiscal policy!
• Wages ‘downward sticky’ so will allow full absorption to return full employment
• New Keynesian school extends ‘downward sticky’ concept to all inputs!
Monetarist school
• Central backs poor policies provoke cycles – keep steady and predictable increases in
money supply!
Austrian school
• Cycles cause by government intervention e.g. forcing low interest rates cause too much
investment and speculative sectors, goes wrong and contraction kicks in!
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!
