Understanding the Business Cycle
Lucas (1977) Understanding the Business Cycle
a) What is the main conclusion in the paper?
b) How did he set up his model and what adjustments did he make to come to the conclusion? c) Do you agree with his conclusion?
Question 7: Hicks (1937)
a) What is his classical theory?
b) What are some of the assumptions? What does each assumption mean? Explain.
c) What is the most important part from Keynes's book he references? What makes it important? What makes it so 'new'?
Question 8: Benigno (2009)
a) Describe the framework of the model presented.
b) What defined the AS curve? What defines the AD curve? [What equations are used? Explain the variables in the main equation of each.]
c) How do temporary and permanent productivity shocks differ? What defines them
Economic Theories
Student’s Name
University
Course
Professor
Due Date
Economic Theories
Lucas (1977)
What is the main conclusion in the paper?
In the paper, Lucas (1977) concludes that business cycles are triggered by monetary shocks. To this end, he posits that only unexpected changes to money supply are likely to influence business cycles in an economy with rational people. With this in mind, government have to occasionally make forceful and flexible responses to eliminate violent fluctuations in the economy with the assistance of economists.
How did he set up his model and what adjustments did he make to come to the conclusion?
In his definition, Lucas (1977) considers business cycles as the fluctuations in the employment, outputs, and the composition of outputs that are induced by movement in prices and other key variables. Given that employment and output are determined by agents in the economy based on price movements, he concludes that the observed quantity movements can be considered as rational and optimal responses to changes in price movements. With this in mind, Lucas (1977) then superimposes huge, unsystematic movements in monetary aggregate. The addition of monetary aggregate effectively introduced noise into the changing relative prices leading to the conclusion that monetary shocks have significant influence on business cycles.
Do you agree with his conclusion?
I agree with the conclusion to a large extent based on the way he set up his model. It is evident that actors in an economy are rational as their decision takes into account the price movement. Thus only monetary shocks that they cannot reconcile are likely to create business cycles.
Hicks (1937)
What is his classical theory?
The theory states that the income depends on the quantity of money, but the level of total employment is not based on income as influenced by income savings and consumption. Thus, while increase in money supply increases employment in either consumption trade of investment trade, the total effect depends upon the ratio between the two industries in the economy as well as the proportion of saved income. To this end, Hick classical model is made up of three main eq...