MacroeconomicsI_working_version (1)

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Chapter 5
5.4.2. Supply Side Business Cycles
The fluctuations of output could also be triggered by the supply shocks. The supply shocks
include the decline in productivity, increase in prices of inputs – the production costs that
lead to the decline in aggregate supply. The sudden unexpected increase in energy prices is
an example of supply side shock. (See OPEC and its influence on the oil-price volatility
during 70’s and 80’s.)
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P
AD
AS
P‘
P
E’
E
Q’
Q*
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Figure 5.3 Decline in aggregate supply and output.
5.5. The Sources of Business Cycles: Theories
External theories assume that fluctuations in economic activity or business cycles are
caused by factors from outside the economic system. They include, for example sunspot
cycles (an obsolete nineteen-century theory), wars and revolutions, and political and social
events. Other external factors, which lead to fluctuations, are the rates of immigration and
population growth, discovery of new resources, and scientific and technological
innovations.
Internal theories acknowledge that certain external factors influence economic activity but
contend that, on the whole, the major causes of business cycles are forces within the
economic system. Among endogenous theories are profit motive (psychological),
monetary, overinvestment, and underconsumption. Some internal theories suggest that
mechanism within the system will naturally generate economic cycles so that, predictably,
every expansion will be followed by recession, contraction and renewed expansion.