A government policy that is consistent with real business cycle theory would be for
A)the monetary authority to expand and contract the nominal money supply in response to shocks to total factor productivity.
B)government to smooth out tax distortions over time.
C)government to vary its spending in response to shocks to total factor productivity.
D)government to vary its spending and taxation decreases in response to shocks that affect the price level.
E)government to vary its lump-sum tax collections in response to changes in total factor productivity.

Question

Quizplus · Accepted Answer

EReal Business Cycle Theory suggests that economic fluctuations are primarily due to real (not monetary) shocks, such as changes in technology or productivity. Therefore, policies consistent with this theory would not involve monetary interventions (like expanding or contracting the money supply) in response to productivity shocks, but could involve smoothing out tax distortions over time (B) to avoid creating additional economic fluctuations and varying lump-sum tax collections in response to changes in total factor productivity (E) to adjust for the changing capacity of the economy without distorting economic decisions.

A Government Policy That Is Consistent with Real Business Cycle