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CA Foundation · Business Economics · Business Cycles

Which of the following explanations of business cycles is associated with Hobson's underconsumption theory?

Hobson's underconsumption theory says that income inequality leaves ordinary consumers with too little purchasing power, while the rich save and invest excessively. Production capacity then outstrips consumption demand, creating overproduction and a downturn. The multiplier-accelerator interaction is a different theory associated with Samuelson and Hicks.

  1. AExcess capacity and gluts arise because the poor have low purchasing power while savings of the rich are over-investedCorrect
  2. BCycles are caused by sunspots affecting agricultural yields
  3. CCycles arise from the interaction of the multiplier and the accelerator
  4. DCycles are caused by cobweb-type lags in the supply of goods

Explanation

Hobson argued that unequal income distribution means the mass of consumers cannot buy the output produced, while the rich save and invest heavily, creating overproduction. This leads to a slump. The multiplier-accelerator interaction is Samuelson's and Hicks' idea, so it is not the underconsumption view.

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