Suppose that a severe shock that decreases investment demand hits the United States. Which of the following can we expect to occur according to the real business cycle model?

Question

Quizplus · Accepted Answer

According to the real business cycle model, a decrease in investment demand will lead to a fall in the real interest rate as households and firms save more in response to the shock. This will lead to a decrease in consumption and output in the short run, but in the long run, the economy will adjust back to its pre-shock level of output through increased saving and investment. Therefore, we can expect the real interest rate to fall in response to the shock.

Suppose That a Severe Shock That Decreases Investment Demand Hits