The real business cycle theory asserts that output can vary significantly over a business cycle even if real wage rate changes are relatively small because
A)labor supply is very responsive to permanent wage rate changes
B)people are willing to substitute leisure intertemporarily
C)firms will adjust their output immediately by laying people off
D)even small changes add up after a while
E)workers spend their wage increases right away

Question

Quizplus · Accepted Answer

The real business cycle theory highlights that output can change significantly throughout a business cycle due to changes in technology, productivity, and other factors. Even if real wage rates do not fluctuate much, people may be willing to adjust their work hours or substitute leisure intertemporarily, leading to changes in output. This is why Choice B, which suggests workers are willing to substitute leisure time, is the best option.

The Real Business Cycle Theory Asserts That Output Can Vary