CA Foundation · Business Economics · Business Cycles
According to Schumpeter's innovation theory of business cycles, the upswing of a cycle begins mainly because:
In Schumpeter's theory, the upswing begins when entrepreneurs introduce a major innovation that proves profitable. Imitators then follow with heavy investment and credit, expanding output and employment. The boom ends once the innovation's gains are competed away, which produces the downswing.
- AEntrepreneurs introduce a major innovation and, after its success, imitators follow with investmentCorrect
- BThe central bank raises interest rates to curb credit
- CConsumers reduce savings due to a change in tastes
- DSunspot activity improves harvests
Explanation
Schumpeter held that clusters of innovations by entrepreneurs, such as a new product or technique, trigger investment and profits. Imitators then follow, creating the boom. When the innovation's profits are competed away, the downswing follows. Monetary and sunspot explanations belong to other theories.
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