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Business cycle accounting is an accounting procedure used in macroeconomics to decompose business cycle fluctuations into contributing factors. The procedure was introduced by V. V. Chari, Patrick Kehoe, and Ellen McGrattan but is similar to techniques introduced earlier. The underlying premise of the procedure is that the economy has a long ...
Hayek created the Austrian business cycle theory, which synthesizes Menger's capital theory and Mises's theory of money and credit. [226] The theory proposes a model of inter-temporal investment in which production plans precede the manufacture of the finished product.
Early real business-cycle models postulated an economy populated by a representative consumer who operates in perfectly competitive markets. The only sources of uncertainty in these models are "shocks" in technology. [2] RBC theory builds on the neoclassical growth model, under the assumption of flexible prices, to study how real shocks to the ...
The Solow model assumes that labor and capital are used at constant rates without the fluctuations in unemployment and capital utilization commonly seen in business cycles. [33] In this model, increases in output, i.e. economic growth, can only occur because of an increase in the capital stock, a larger population, or technological advancements ...
Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, government institutions, and private sector firms. There are many definitions of a business cycle.
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.
This graph shows the circular flow of income in a five-sector economy. The flow of money is shown with purple, and the flow of goods and services is shown with orange. Money flows in the opposite direction from goods and services. [1] Basic diagram of the circular flow of income.