Theories Business Cycle Determine Viable. Explain Rationale.

¶ … theories business cycle determine viable. Explain rationale. B) Recommend policy bring U.S. current economic slump. Provide specific examples support response.

Business Cycle Theories

A) There are several theories that refer to the business cycle. The real business cycle theory states that fluctuations within the business cycle are determined by technological shocks. In the opinion of Finn E. Kydland and Edward C. Prescott, economic crisis and fluctuations cannot be determined by monetary shocks, but by external shocks, like technological developments and innovation. This theory is reflected by the Industrial Revolution and its effects.

The technological progress determined by the Industrial Revolution influenced significant productivity developments, the focus on industrial production, and the increase of GDP. This increased production capacity determined increases in supply (Ascari, 2010). Therefore, the specialists in the field that are in favor of this theory consider that the effects determined by these technological developments are more important than those determined by fluctuations in credit and debt. The significant increases in individuals' wages also reflect the impact of technological progress on the economy. Other specialists in the field have discovered that technological developments also determine increased levels of speculations on financial markets.

Another important theory is represented by the Austrian business cycle theory. This theory states that business cycles are determined by significant growth in bank credit combined with central bank policies and strategies that are not in accordance with the economic situation. This leads to interest rates maintained at low levels, which determines significant increases in credit for the population and companies, and reduced levels of savings. This leads to bubbles in different sectors of the economy, caused by speculations.

In my opinion, the Austrian business cycle theory seems to be the most viable. This is reflected by the economic and financial crisis that was determined by the housing bubble. The easy conditions provided by the banking system allowed numerous individuals access to housing loans.

B) The policy changes that the U.S. should take into consideration are represented by modifying the fiscal policy. In other words, the policy should focus on increasing government deficits. This is because increasing deficits was successfully used in order to reduce unemployment. This deficit should be used in order to provide fiscal stimulus to small and medium companies (Krugman & Wells, 2010). The U.S. economy relies on the activity of such companies. Therefore, it is important to help them sustain their activity. This helps reduce the unemployment. Another reason for sustaining large deficits relies on the fact that the private sector is not able to increase its spending in certain economic sectors. This means that the public sector must increase its spending in these areas.