According to real business cycle theorists, an increase in total factor productivity could lead to an increase in the nominal money supply due to
A) the cyclical behaviour of tax collections and attempts by the Bank of Canada to stabilize real output.
B) Bank of Canada attempts to stabilize real output and the price level.
C) Bank of Canada attempts to stabilize the price level and banking sector expansion of deposit money.
D) banking sector expansion of deposit money and the cyclical behaviour of tax collections.
E) Bank of Canada attempts to stabilize business cycle fluctuations.

Question

Quizplus · Accepted Answer

According to real business cycle theorists, an increase in total factor productivity leads to an increase in output, which leads to an increase in banking sector expansion of deposit money. To stabilize the resulting increase in prices, the Bank of Canada will attempt to stabilize the price level by increasing the nominal money supply. Therefore, banking sector expansion of deposit money and attempts by the Bank of Canada to stabilize the price level are the two factors that would result in an increase in the nominal money supply. Choice C captures both of these factors.

According to Real Business Cycle Theorists, an Increase in Total