CA Foundation · Business Economics · Business Cycles
Which of the following business cycle theories attributes cyclical fluctuations mainly to the expansion and contraction of bank credit and the resulting changes in the money supply?
Hawtrey's monetary theory is correct. It explains business cycles as purely monetary phenomena caused by expansion and contraction of bank credit, which alter the money supply and the flow of money income. The other theories rely on innovations, climate or price-output lags instead.
- ASchumpeter's innovation theory
- BHawtrey's monetary theoryCorrect
- CSunspot (climatic) theory of Jevons
- DCobweb theory
Explanation
Hawtrey held that cycles are purely monetary phenomena driven by changes in bank credit and the money supply. Schumpeter's theory relies on clusters of innovations, Jevons's on weather effects on agricultural output, and the cobweb theory on price-output lags in agriculture. So only Hawtrey's theory matches the description.
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