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Part - V
Prescott and Kydland showed that business cycles were not the result of a malfunctioning economy but that of real supply-side shocks such as the increase in the price of oil. So, contrary to Keynesian thought, it is the economy which is responding to shocks that hit it.
The Keynesian approach leads one to believe that business cycles are caused by shocks to the aggregate demand such as a collapse in the investor confidence. These business cycles can be dampened by the use of monetary policy. Prescott and Kydland presented a radically different view. They suggested that if business cycles were caused by supply shocks, then there is not much role for a central bank to smooth them out.
Concluded.
* Contributed by -
Ravi Birhman, B.E. (Computer Science), BITS, Pilani,
Kshitij Goel, B.Tech. (Mechanical), IIT Guwahati,
Post Graduate Diploma in Management (First Year),
Indian Institute of Management, Calcutta.
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