Real business cycle theorists take the comovement of aggregate output and Solow residuals as strong confirmation that economic fluctuations are caused by ________.
A)changes in aggregate demand
B)changes in the money supply
C)changes in the rate of inflation
D)productivity shocks

Question

Quizplus · Accepted Answer

Real business cycle theorists believe that fluctuations in economic output are caused by productivity shocks, which are changes in the availability of production technology, natural resources, or relative prices. These shocks affect the Solow residual, which measures the portion of output that is not explained by the inputs of labor and physical capital. The fact that output and Solow residuals tend to move together provides evidence supporting the idea that fluctuations in productivity are a key driver of business cycles.

Real Business Cycle Theorists Take the Comovement of Aggregate Output