The real business cycle theory states that
A)changes in money supply result in output fluctuations
B)labor supply is highly elastic in response to permanent changes in the real wage rate
C)the most important economic disturbances arise from supply shocks or unanticipated changes in productivity
D)firms are reluctant to change prices due to the menu costs involved
E)a change in labor productivity will not have a long-lasting effect on real output

Question

Quizplus · Accepted Answer

The real business cycle theory emphasizes the significance of supply side shocks or changes in productivity as the primary cause of economic disturbances. It suggests that fluctuations in output are primarily due to changes in technological advances, business cycles and supply and demand dynamics. Other options such as changes in money supply (A), labor supply (B) or sticky prices (D) are not central to the real business cycle theory. As for (E), the real business cycle theory does believe that changes in productivity will have long-lasting effects on real output.

The Real Business Cycle Theory States That