CA Foundation · Business Economics · Business Cycles
In Hawtrey's monetary theory of business cycles, the cycle is primarily caused by which of the following?
Hawtrey's theory holds that business cycles are a purely monetary phenomenon, driven by expansion and contraction of bank credit and the money supply. Changes in credit alter merchants' stock holdings and demand for goods. Technology, sunspots and under-consumption relate to other theories.
- ARandom changes in technology and innovations
- BFluctuations in the flow of bank credit and money supply, affecting merchants' demand for goodsCorrect
- CVariations in sunspots affecting agricultural output
- DUnder-consumption due to unequal income distribution
Explanation
Hawtrey argued the cycle is purely monetary: expansion and contraction of bank credit change the interest rate and merchants' inventories, hence output. Technology-driven fluctuations belong to Schumpeter's innovation theory, sunspots to Jevons, and under-consumption to Hobson-type theories.
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