A Kind of Neither Keynesian Nor Neoclassical Model (2): The Business Cycle

DOI: 10.4236/oalib.1103215, PP. 1-14

Keywords: Cobb-Douglas Function, Business Cycles, Phase Diagram, Unemployment Rate

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Abstract:

The Cobb-Douglas function not only leads to a long-term relationship between the rate of output change and the interest rate, but also analyzes why they fluctuate in the short-term. This paper first divides the fluctuation cycle of the interest rate in the statistical data of the past 45 years by using the mathematical phase diagram method, and draws the phase diagram of the rate of output change on the interest rate according to the cycle equation of output. From this phase diagram, we explain the reason that the phase difference between the interest rate and the rate of output change in the fluctuation. Then, according to the optimal relation between L and K in the Cobb-Douglas function, we further derive the employment equation and its relation to the real interest rate and the rate of real output change, and verify the theoretical speculation with statistical data. Finally, it is concluded that the business cycle is a kind of endogenous production phenomenon.

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