Austrian Business Cycle Theory

Question 1

Non-Monetary Theories

Answer 1

Keysians and Real Business Cycle Theorists

Question 2

Monetary Theories

Answer 2

Austrians, Monetarists, and New Classical’s

Question 3

Austrian View of Business Cycle

Answer 3

• Artificial Credit Expansion
• “Artificial Boom”
• Crunch
  a. Credit Crunch (and/or)
  b. Real Resource Crunch
• Recession / Liquidation Phase
• Recovery

Question 4

How make bad less bad?

Answer 4

• Don’t inflate more. (Don’t drink more caffeine)
• Make the bankruptcy process easier.
• Make Mergers and Acquisitions easier.
• Increase Savings

Question 5

Keynsians

Answer 5

Cause
- Everything is tied to expenditures.
- Y = C + I + G + (X - M)
- Investments are unstable due to “animal spirits.”
- Herd Mentality
Cure
- More spending--on anything and everything.
- And Socialize Investment.

Question 6

Real Business Cycle Theory

Answer 6

Cause
- A shock, usually a supply shock, is sent into the system.
Cure—to what? There’s no such thing as a cycle.
- (These fluctuations are Pareto efficient responses to shocks, so any intervention is bad.)

Question 7

New Keynesians

Answer 7

Cause
- Irregular Shocks to Aggregate Demand
- Sticky Wages & Sticky Prices stop equilibration
- “Menu Costs” prevent market coordination
Cure
- Cannot “Fine-Tune” economy
- Can boost Aggregate Demand if the hole is big
- “Coarse-Tune” the economy

Question 8

What intervention IS NOT

Answer 8

• Govt protects prop rights
• Partial socialization
• Govt buying up goods to drive prices up

Question 9

Intervention

Answer 9

• Restriction on production

- Interference in structure of prices