According to the new classical cycle theory, business cycles are caused by
A) expected changes in aggregate demand.
B) changes in investment.
C) changes in the growth rate of the money supply.
D) unexpected changes in aggregate demand.

Question

Quizplus · Accepted Answer

According to the new classical cycle theory, business cycles are caused by unexpected changes in aggregate demand. This is because new classical economists believe that people have rational expectations and adjust their consumption and savings behavior based on changes they anticipate in their future income and wealth. As a result, only unexpected changes in aggregate demand can cause fluctuations in economic activity.

According to the New Classical Cycle Theory, Business Cycles Are