If the real interest rate is 4 percent and workers expect real wages to be 2 percent year higher next year, according to real business cycle theory, workers will work

Question

Quizplus · Accepted Answer

According to real business cycle theory, workers respond positively to increases in the expected future real wage by working more in the present. As such, workers will work more this year (due to the expected increase in wages next year), but work less next year (as the increase in wages will decrease the marginal utility of work). Additionally, since the real interest rate is only 4 percent, it is not sufficiently high to incentivize workers to save rather than work, further supporting the conclusion that workers will work more this year.

If the Real Interest Rate Is 4 Percent and Workers