CA Foundation · Business Economics · Business Cycles
Which of the following business cycle theories attributes cyclical fluctuations mainly to the sun-spot activity affecting agricultural output and, through it, the rest of the economy?
Jevons' sunspot theory is the correct answer. It holds that sunspots alter rainfall and crop yields, which change farm incomes and demand and so spread through the economy as cycles. The other theories rely on innovation, monetary over-investment or psychology, not weather.
- AJevons' sunspot theoryCorrect
- BSchumpeter's innovation theory
- CHayek's over-investment theory
- DPigou's psychological theory
Explanation
W. S. Jevons argued that sunspots influence rainfall and crop yields. Crop output changes affect incomes, demand and trade, so the whole economy fluctuates. Schumpeter's theory relies on innovations, Hayek's on monetary over-investment, and Pigou's on waves of optimism and pessimism, so these are not sunspot-based.
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