Over the past decades, different ideas, perceptions, and beliefs of macroeconomists have resulted in the development of different business cycle theories. Among the business cycle theories are the Keynesian Theory, Classical Theory, Monetarism Theory, the Aggregate supply-Side Theory, and the Real Business Cycle Theory. These theories are used by government officials and businessmen in analyzing the cause and consequences of a particular action on the movement of aggregate demand in a country’s economy. (Balls, 2003)
The author aims to elaborate the differences between the Real Business Cycle (RBC) Theory versus the Keynesian Theory, Classical Theory, Monetarism Theory, the Aggregate supply-Side Theory by clearly stating the different political, environmental, and monetary interventions including the free-market forces as well as the individual beliefs of the economic theorists that influence the movement of the aggregate demand curve in each business cycle theories. In line with the business cycle theories, this paper will discuss the different external factors which could directly create a demand shock or a sudden temporary increase or decrease of demand for goods and services in the business cycle.
Analysis of the differences between the business cycle theories is very useful for the government as well as the multi-national companies in terms of evaluating a country’s economic performance and developing some strategies for businesses respectively.
The open country like the UK is highly susceptible to exogenous shocks. (Riley, 2006) As an open country, the UK is greatly affected by the changes in the international market. For example, the export market is at its peak will eventually have a positive effect on the UK economy. The increase in demand for export goods will create an opportunity for manufacturing companies to produce more goods and services and employment for UK citizens.