In Summary...

The four business cycle theories each suggest different impulses as the cause of the business cycle. In addition, some disagreement exists about whether the economy automatically recovers from a recession. Fortunately, recalling these differences is not too difficult.

Keynesian theory points to expectations about future profits and sales as the impulse and is the only theory that says that the economy will not automatically move from a recession to an expansion.

Monetarist theory, as its name suggests, asserts that it is changes in the growth rate of the money supply that is the impulse creating the business cycle. It also states that the economy will automatically recover from recession.

The very name of the rational expectations theories gives away the main impulse. These theories contend that expectations about aggregate demand are the primary impulse and that the economy automatically moves from recession to expansion.

The real business cycle theory suggests that changes in productivity growth are the impulse that causes the business cycle and that the economy will automatically recover from recession.

You must learn the details about the different theories of the business cycle. Luckily, even aside from the very clear presentation in the textbook itself, this topic is the main thrust of the Study Guide to accompany the text. You should check out Learning Challenges, the work True or False question 4 to 9; Multiple Choice questions 2 to 11, and Short Answer question 2. Be sure not to miss any of these questions.

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