Suppose that a severe shock that decreases investment demand hits the United States.Which of the following can we expect to occur according to the real business cycle model?
A) The Fed will lower the federal funds rate.
B) The structural deficit will increase.
C) The real wage rate will rise.
D) The real interest rate will fall.

Question

Quizplus · Accepted Answer

According to the real business cycle model, a decrease in investment demand would lead to a decrease in output, employment, and the real interest rate. This is because the shock decreases the productivity of the economy, leading to a slowdown in investment and a decrease in the real interest rate as firms reduce their demand for funds. Therefore, the real interest rate will fall. Choices A, B, and C are not expected outcomes according to this model.

Suppose That a Severe Shock That Decreases Investment Demand Hits