Evaluate the different schools of thought that exist with regard to stabilization of business cycles Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts (25, July, 2011) Business cycle is a pattern of repetitive fluctuations in the economic growth of a country…
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(1) Self-correcting mechanism (2) Keynesian theory of business cycles (3) Real business cycle theory. The self-correcting mechanism states that if any of the major economic problems (inefficiency, slow growth, instability etc.) would occur in the economy then the mechanisms of “self interest” and “invisible hand” will rectify these problems. The self-correcting mechanism was proposed by Adam Smith. He suggested that in any such condition the forces of demand and supply will work automatically and the equilibrium will be restored by self correcting mechanism. But when the self-correcting mechanism failed badly due to problems such as inflation and unemployment, John Maynard Keynes, the founder of macro economics, disagreed with the phenomenon of self-correcting mechanism. In his theory he has focused on the role of government and the aggregate demand. J.M. Keynes has suggested that the higher the level of the aggregate demand, the higher will be the level of employment, supply and economy. In his theory he has discussed the demand side of the business cycle. He suggested that whenever there is a downfall in the economy the government should increase the aggregate demand through economic policies (fiscal and monetary) and through increase in investment expenditure. According to him a raise in aggregate demand will result in growth in supply, employment, income and economy.
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