|Causes of Business Cycles
|Changes in technology.
|No action is necessary; wages and prices adjust through demand-supply characteristics pulling or pushing the economy form expansion or recession level to its full-employment level.
|Shifts in AD due to changes in business expectations can lead to over or under investments.
Downward sticky wages prevent a self-recovery from contraction (SRAS curve is slow to move down).
|Authorities should use fiscal and/or monetary policy to shift the AD curve directly to get the GDP to its full employment level.
|In addition to Keynesian beliefs, this theory believes other factors of production are also downward sticky, presenting additional barriers to self-recovery.
|Same as Keynesian (use fiscal and/or monetary policy to shift the AD curve directly to get the GDP to its full employment level).
|Inappropriate changes in money supply growth rate.
|Monetary authorities should follow policies of steady, predictable growth rate of money supply.
|Government intervention in economy.
|Policymakers shouldn’t keep interest rates at artificially low levels. Markets should be allowed to self-correct.
|New Classical (RBC Theory)
|Changes in technology and external shocks.
|Policymakers shouldn’t try to counteract business cycles, as expansions and contractions are rational market reactions to external shocks. Theory assumes that individuals and firms try to maximize their utility functions.