Business cycles of an economy refers to the fluctuations in outputs and employment level of that economy.Almost all economists agree upon the fact that output remain at natural rate in the long run whereas there exists fluctuations in the short run that are not predictable.These random and irregular fluctuations in output from its natural rate are termed as business cycles.Business cycles are followed by contractions and expansions in economic activity and measured by changes in real GDP.
There exist a lot of questions regarding business cycles and thus different school of thoughts.The economists disagree upon that is why output deviate in the short run not in the long run, why the same resources yield different outputs, how some economies have more while others have less fluctuations in output and what factors work behind the booms and recessions.
There are many theories to explain the causes of business cycles the prominent of which are disequilibrium models(Keynesian) and equilibrium models(Monetarist), these models explain business cycles emphasizing on the factor demand for labor that there is lack of demand for workers and consider it the cause by stating that labor market do not clear in the short run and adjustments take time because wages and prices are sticky.If output goes down it is due to that market fails to clear pushing the economy into recession.
An important explanation of business cycles is by Real Business Cycle Theory based on the classical assumptions.
