CA Foundation · Business Economics · Business Cycles
According to Schumpeter's innovation theory of business cycles, what is the main cause of the upswing in economic activity?
Schumpeter attributed the upswing to clusters of innovations. When entrepreneurs introduce new products or methods, investment and credit expand, imitators follow and the economy booms. When the profit from innovation vanishes, the boom ends and a contraction begins. This differs from monetary or underconsumption explanations of cycles.
- AClustering of innovations that prompts a wave of new investment by entrepreneursCorrect
- BExcess creation of bank credit by commercial banks
- CUnderconsumption caused by low wages
- DRandom shocks in the weather affecting harvests
Explanation
Schumpeter held that entrepreneurs introduce innovations in clusters, which draws in imitators and bank credit and creates a boom. Once the gains from the innovation are competed away, the boom ends and a downturn follows. Excess bank credit is Hawtrey's explanation and underconsumption is Hobson's.
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