According to the real business cycle theory, a decrease in labor productivity will
A)increase both prices and output
B) decrease both prices and output
C) increase prices and decrease output
D)decrease prices and increase output
E)have no effect on prices or output

Question

Quizplus · Accepted Answer

According to real business cycle theory, a decrease in labor productivity will lead to a decrease in output as firms will produce fewer goods. At the same time, prices will increase as firms will attempt to maintain profit margins by charging higher prices for their reduced output. Therefore, the correct choice is C, which states that there will be an increase in prices and a decrease in output.

According to the Real Business Cycle Theory, a Decrease in Labor