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Empirical evidence showed that growth rates of low income countries varied widely instead of converging to a uniform income level [171] as expected in earlier, neoclassical models. [ 172 ] Following research on the neoclassical growth model in the 1950s and 1960s, little work on economic growth occurred until 1985. [ 55 ]
It turned out that pure new classical models had low explanatory and predictive power. The models could not simultaneously explain both the duration and magnitude of actual cycles. Additionally, the model's key result that only unexpected changes in money can affect the business cycle and unemployment did not stand empirical tests.
Real business-cycle theory (RBC theory) is a class of new classical macroeconomics models in which business-cycle fluctuations are accounted for by real, in contrast to nominal, shocks. [1] RBC theory sees business cycle fluctuations as the efficient response to exogenous changes in the real economic environment.
Theories of endogenous money date to the 19th century, with the work of Knut Wicksell, [1] and later Joseph Schumpeter. [2] Early versions of this theory appear in Adam Smith's 1776 book The Wealth of Nations. [3] With the existence of credit money, Wicksell argued, two interest rates prevail: the "natural" rate and the "money" rate. The ...
A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices.
Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion ...
The new neoclassical synthesis (NNS), which is occasionally referred as the New Consensus, is the fusion of the major, modern macroeconomic schools of thought – new classical macroeconomics/real business cycle theory and early New Keynesian economics – into a consensus view on the best way to explain short-run fluctuations in the economy.
The multiplier–accelerator model can be stated for a closed economy as follows: [3] First, the market-clearing level of economic activity is defined as that at which production exactly matches the total of government spending intentions, households' consumption intentions and firms' investing intentions.