Question

Explain which business cycle theory, if Real business cycle or Keynesian Coordination failure model with or without sticky prices, subscribes to each one of the following

1) Workers are worried about their position relative to other workers, and do not accept wage cuts in recessions.

2) Business cycles are caused by misguided government policies.

3) Business cycles are driven by changes in aggregate demand, which are, in turn, caused by fluctuations in government spending.

Answer 1

Answer:-

a) Workers are worried about their position relative to other workers and do not accept wage cuts in recessions.

Solution: Keynesian Theory

Explanation: Keynes thought that workers were so worried and concerned about their wages relative to those at other firms that no firm dared to cut pay

c) Business cycles are caused by misguided government policies.

Solution: Policy Induced Theory

Explanation: The policy-induced boom is unsustainable; eventually, prices will rise and finally the economy will settle back.

c) Business cycles are driven by changes in aggregate demand, which are, in turn, caused by fluctuations in government spending.

Solution: business cycle fluctuations

Explanation:Business Cycle Theory sees all fluctuations in economy as caused by real shocks as in this case