According to real business cycle theory, an increase in productivity ________ the demand for loanable funds, ________ the demand for labour, and ________ the supply of labour. The real interest rate will ________.
A)increases; increases; does not change; fall
B)increases; increases; does not change; rise
C)decreases; decreases; decreases; fall
D)increases; increases; increases; rise
E)increases; increases; increases; fall

Question

Quizplus · Accepted Answer

According to real business cycle theory, an increase in productivity increases the demand for loanable funds, which raises the real interest rate. This also increases the demand for labour, as firms require more workers to produce more output. With an increase in demand for labour, the supply of labour also increases, as individuals are more likely to enter the labour market when wages rise. Therefore, the increased demand for loanable funds and labour, along with the increased supply of labour, lead to a higher real interest rate and higher employment levels, resulting in an increase in productivity.

According to Real Business Cycle Theory, an Increase in Productivity