Business cycles are the short-run fluctuations of aggregate economic activity around its long-run growth path. The Austrian Business Cycle Theory is the economic theory initiated by the Austrian School of Economics, concerning how business cycles occur. The theory sees business cycles as the reason for the excessive growth of bank credit, due to an artificially low market interest rate. The Austrian theory of the business cycle originates from the work of Austrian school economists Ludwig Von Misses and Friedrich Hayek. The 1863 book entitled The Great Depression by Mary Ruthbard in which she easily outlines the Austrian theory of business cycles, booms and busts or inflationary periods and deflationary periods. Business Cycles and Economic Fluctuations Business cycles are defined in Webster's dictionary as “economy-wide fluctuations in production, trade, and general economic activity over several months or years in an economy organized according to the principles of free enterprise.” These cycles have three main characteristics; expansion, recession and depression. The expansion is known as increased demand for capital and consumer goods. Recession is known as the time when an economy slows down and the level of sales and production begins to decline. Depression is known as the decrease in demand for products and services, forcing companies to close some manufacturing plants, a period of recession ushers in depression. Depression in Business Cycles According to Austrian business cycle theory, the depression of the 1930s was a consequence of central inflation and the expansion of bank credit in the 1920s. But the Federal Reserve had been extremely inflationary during World War I, doubling the money supply from 1915-1920. The years 1920-192... middle of paper... occur, however, because there are several disturbances in the economy. Booms can also be caused by surges in public or private spending. An example of this is that if the government spends a lot of money fighting a war but does not increase taxes, the increased demand will cause not only an increase in the production of war materials, but also an increase in citizens' take-home income. government plant workers. It will also increase the production of all the goods and services that these workers want to purchase with their wages. Likewise, a wave of optimism that pushes consumers to spend more than usual and companies to build new factories will lead the economy to expand. Recessions or depressions can be caused by these same forces working in reverse. A substantial cut to the government. spending or a wave of pessimism among consumers and businesses can cause the production of all types of goods to fail.