CA Foundation · Business Economics · Business Cycles
Which of the following statements best reflects the Keynesian explanation of business cycles?
The Keynesian view is that business cycles arise from fluctuations in aggregate demand, mainly due to unstable investment shaped by business expectations. When demand falls short, output and employment decline, and when it recovers, expansion follows. Weather and credit-only explanations belong to other theories.
- AFluctuations in aggregate demand, driven largely by volatile investment and shifts in expectations, cause cyclesCorrect
- BCycles result only from variations in weather and harvests
- CCycles are caused entirely by changes in bank credit and short-term interest rates
- DCycles occur only because of changes in tastes of consumers for imported goods
Explanation
Keynes emphasised that changes in aggregate demand, especially unstable private investment shaped by expectations about the marginal efficiency of capital, drive output and employment. Weather points to Jevons's theory, and credit-driven explanations point to Hawtrey's monetary theory.
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