Suppose that in response to a decrease in real interest rates, a person decides to reduce his supply of labour today and increase it in the future.This behaviour is most consistent with the
A)new Keynesian cycle theory.
B)new classical cycle theory.
C)monetarist cycle theory.
D)real business cycle theory.
E)Keynesian cycle theory.

Question

Quizplus · Accepted Answer

In real business cycle theory, changes in real interest rates are seen as primarily driven by changes in productivity, which can cause people to change their labor supply decisions. Specifically, a decrease in real interest rates could signal an increase in expected future income, encouraging someone to reduce their labor supply today and increase it in the future when their wages are higher. This behavior is consistent with the idea of intertemporal substitution in labor supply, which is a key component of real business cycle theory.

Suppose That in Response to a Decrease in Real Interest