In real business cycle theory, a decrease in productivity leads to all of the following events except
A)a decrease in the demand for loanable funds.
B)a decrease in the demand for labour.
C)a fall in the real interest rate.
D)a decrease in the supply of labour.
E)a rise in the real wage rate.

Question

Quizplus · Accepted Answer

In real business cycle theory, a decrease in productivity typically leads to a decrease in the demand for labor (as firms produce less and thus need fewer workers) and a decrease in the supply of labor (as workers choose to enjoy more leisure when the return to working decreases). It also leads to a decrease in the demand for loanable funds (as there are fewer profitable investment opportunities) and can lead to a fall in the real interest rate (as the demand for loanable funds decreases). However, it does not lead to a rise in the real wage rate; instead, the real wage rate is likely to fall because the demand for labor decreases.

In Real Business Cycle Theory, a Decrease in Productivity Leads