According to real business cycle theory,an increase in financial frictions might lead to ________,if ________.
A)a decrease in output;the rise in the credit spread causes a leftward shift of aggregate demand
B)a decrease in inflation;the disruption of capital markets results in a leftward shift of long-run aggregate supply
C)a decrease in output;the disruption of capital markets results in a leftward shift of long-run aggregate supply
D)a decrease in output;a decline in expected output causes a leftward shift of aggregate demand

Question

Quizplus · Accepted Answer

According to real business cycle theory, an increase in financial frictions can lead to a decrease in output if the disruption of capital markets results in a leftward shift of the long-run aggregate supply. This is because financial frictions can impede the efficient allocation of resources and reduce the productivity of firms, leading to a decrease in output. The other answer choices are not consistent with the predictions of real business cycle theory.

According to Real Business Cycle Theory,an Increase in Financial Frictions