CA Foundation · Business Economics · Business Cycles
According to Schumpeter's innovation theory of business cycles, an economic upswing is mainly triggered by which of the following?
Schumpeter's theory says cycles begin when entrepreneurs introduce clusters of innovations, such as new products or methods. These attract bank-financed investment and set off expansion. Monetary contraction, under-consumption and weather are explanations from other theories, not Schumpeter's main cause of the upswing.
- AA sudden fall in the money supply by the central bank
- BClustering of major innovations introduced by entrepreneurs, leading to new investmentCorrect
- CUnder-consumption caused by low wages
- DRandom fluctuations in rainfall and harvests
Explanation
Schumpeter held that entrepreneurs introduce innovations such as new products or production methods, and these appear in clusters. Bank credit finances the new investment, which starts expansion. A fall in money supply is a monetary-theory explanation, and rainfall belongs to the climatic theory, so neither is Schumpeter's cause.
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