According to Prof. R. G. Hawtrey, a British economist, there is direct relationship between volume of money supply and the economic activity. Wherever there is change in the flow of money or money supply changes, there will be business fluctuations. Here, he means the credit creation by the banking system i.e., expansion in bank credit leads to demand and so the upswing of business cycle starts. On the other hand, when there is decrease in money supply through contraction of bank credit, it leads to down swing and thus leads to depression.Expansion of bank credit happens when interest rates are reduced, which means, the loans are cheaper. Due to liberal loans, the profit margins change as they are very sensitive to the change in interest rate.Thus, investment increases and so the employment, which in turn increase the...
Over-Investment Theory of Business Cycle from Managerial Economics
A.F. Hayek assumes economy in equilibrium. Whenever this equilibrium is disturbed then there is expansion or contraction. This theory says that when the economy is in equilibrium, the rate of interest is such that Saving = Investment there is no unemployed resources.Suppose the bank credit expansion takes place, then the equilibrium rate of interest is disturbed. This low market rate of interest will tempt the businessmen to borrow more and invest in new ventures. This leads to upswing in business cycle; as a result employment, output, profit and demand increases.But then this phase does not continue indefinitely. Due to scarcity of resources, this expansion phase cannot go on and on. But due to increase in price, the people are forced to decrease consumption and start saving more. This forced saving due to high price...
Schumpeter Theory of Business Cycle in Managerial Economics
Joseph Schumpeter has explained the expansion and contraction through industrial innovation. Innovation is an actual application invention; whereas invention is discovery of something new.Invention converts into innovation. In this theory, the innovation can be introduction of new product, market source of raw material, opening of new market in business. An entrepreneur is an innovator, he has the knowledge to do something new, daring and foresight to go ahead of others and in this process he demands funds from banking system. Now, we will examine how innovation causes business fluctuations. In this theory, Schumpeter says, any innovation causes business fluctuations. In this theory, Schumpeter says, any innovation can move the economy to disequilibrium from equilibrium and this will continue till the new equilibrium position...
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