Lesson 40 Assignment – Explain the basics of the Austrian theory of the business cycle. What is the difference, in terms of consequences, between lower interest rates that result from the saving choices of individuals, and lower interest rates that are achieved artificially, by a government-established central bank

The Austrian theory of the business cycle claims that the communication between the consumer and the producer is done through interest rates. If interest rates are not artificially tampered with, it will mean that they can clearly read the demands of the consumer and meet their needs accordingly. When a central bank intervenes, it means that the communication between the producer and consumer is no longer clear, and lack of economic coordination means that resources will be misallocated, leading to recessions and poor working conditions in certain sectors. The key point of the Austrian business cycle theory is that interventions in the monetary system, and there is some debate over what form those interventions must take to set in motion the boom-bust process—create a mismatch between consumer time preferences and entrepreneurial judgments regarding those time preferences. The problem when intervention is that it creates a false sense of demand. This is because Money is property, and under a monetary system which makes it appear that more property exists for production than actually exist, it will inevitably lead to failure in achieving greater results in terms of standard of living for peoples.