A government policy that is consistent with real business cycle theory would be for
A) government to vary its spending in response to shocks to total factor productivity.
B) the monetary authority to expand and contract the nominal money supply in response to shocks to total factor productivity.
C) government to smooth out tax distortions over time.
D) government to vary its lump-sum tax collections in response to changes in total factor productivity.
E) government to vary its spending and taxation decreases in response to shocks that affect the price level.

Question

Quizplus · Accepted Answer

Real business cycle theory suggests that government should aim to minimize distortions in the economy, such as those caused by taxes, and allow the economy to adjust naturally to productivity shocks. Smoothing out tax distortions over time aligns with this approach.

A Government Policy That Is Consistent with Real Business Cycle