Sample Essay

This section analyses the non existence of association between growth and business fluctuations. Friedman (1986) firstly investigated economic growth and cyclical activity relationship for American economy. Following him many others (see Table 1) tried to answer the relationship question referring to his findings. So Friedman’s paper was a keystone in the explanation of no relationship. He states that fluctuations in output around the natural rate happen due to price misperceptions caused by monetary shocks.

By increasing/decreasing money supply, the government can affect interest rates. Therefore as price for holding money increases/decreases people rise/reduce their savings. As a result, investment and consumption are affected which in turn affect growth in output and real GDP. Furthermore, Friedman says that changes in the growth rate of the national production are caused by real industrial factors, such as technology and the application of science. This determines the remaining effect on the economy. Moreover, he supports a business cycle model based on the natural rate hypothesis which states that there is not any relationship between secular and cyclical activity (Henry, Olekans, 2002). The main problem related to Friedman’s investigation is that he has not applied any empirical model in his research which limits its usefulness.

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