Answer to Question #151539 in Macroeconomics for Maria Arshad

Question

briefly explain Catastrophe Theory of Economic Fluctuation. You must explain each phase, its roots and recovery. B) Are there any policy implications of the theory? C) Critically evaluate the theory you just explained in (a) above

Answer 1

The theory has a basis on business cycles where there is wealth differences between recessions and depressions, these shocks change saving propensities.

This fluctuation goes through five phases

1. Depression in which the business activity in the region or country is way far beyond the normal. With reduced Production l, unemployment and low prices

2. The recovery phase is where there is increase in business activity after depression. Production starts to rise slowly.

3. The prosperity, where there is high Production, high capital investment as well as high prices on goods and record profits. There is also full employment.

4? The Boom phase, here there is expansion of activity, high stocks, higher profits and there is full employment. there will then be a high inflation of prices.

4. Recession is the last phase where which comes with cumulative effect on the market. It will at the end achieve the shape of a depression

Evaluation

This is a competitive theory, it facilitates bringing forth prior knowledge of analysis basing on, structures with a single capital good to give rise to observed comovements og economic aggregates anf persistence of deviations og output from trend when common parameters are assumed.