Economics · Macroeconomics and Business Cycles
Evaluate the following statements regarding the Psychological Theory of Business Cycles: Statement I: A.C. Pigou argued that business cycles are caused by 'errors of optimism' and 'errors of pessimism' among entrepreneurs. Statement II: Optimism leads to over-investment, and when the error is realized, the mood shifts to pessimism, leading to a crash. Statement III: These psychological waves are independent of any real economic changes like harvest results. Statement IV: The duration of the cycle is determined by the time it takes for a collective mood to spread. Which set of statements is correct?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Statement I, II, and IV are correct.✓
- 2Statement II and III are correct.
- 3Only Statement I and II are correct.
- 4All statements are correct.
Correct answer
Statement I, II, and IV are correct.
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