CFA Level I · CFA Level I Exam · Understanding Business Cycles
Austrian school economists most likely explain the business cycle as resulting from:
Austrian economists explain cycles as the result of central bank credit expansion that pushes interest rates below natural levels, causing malinvestment that later must be corrected in a bust. Technology shocks are the RBC view, and inadequate government spending is a Keynesian explanation.
- Acredit expansion by the central bank that pushes interest rates below natural levels and causes malinvestmentCorrect
- Brandom technology shocks that alter the productivity of labor and capital
- Cinsufficient government spending that leaves aggregate demand below potential
Explanation
The Austrian school holds that central bank credit expansion holds interest rates artificially low, which encourages unsustainable investment (malinvestment) that must later be liquidated in a bust. Technology shocks are the RBC explanation, and insufficient government spending is a Keynesian argument.
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