CA Foundation · Business Economics · Business Cycles
Which of the following theories explains business cycles mainly as a result of expansion and contraction of bank credit that alters the working capital of traders?
Hawtrey's monetary theory explains cycles through expansion and contraction of bank credit. Cheap credit leads traders to raise stocks and output, creating a boom, while credit restriction forces destocking and a downturn. Schumpeter focuses on innovation and Hobson on underconsumption, so they are not the correct choice.
- ASchumpeter's innovation theory
- BKeynes' theory of the multiplier
- CHawtrey's monetary theoryCorrect
- DHobson's underconsumption theory
Explanation
Hawtrey viewed the cycle as a purely monetary phenomenon. Banks expand credit and lower interest rates, so traders hold more stock and output rises. When credit is later restricted, activity contracts. The other theories rely on innovation, income multipliers or consumption shortfalls.
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