Suppose that a severe shock that decreases the demand for loanable funds hits Canada.Which of the following can we expect to occur according to real business cycle theory?
A)People will work fewer hours.
B)The real wage rate will fall.
C)The demand for loanable funds will decrease.
D)The real interest rate will fall.
E)All of the above are true.

Question

Quizplus · Accepted Answer

According to real business cycle theory, a decrease in the demand for loanable funds can lead to a decrease in investment, which in turn can cause a decrease in productivity and economic output. This can lead to people working fewer hours (A) as businesses cut back on production. The real wage rate may fall (B) due to decreased demand for labor. The premise of the question already states that the demand for loanable funds will decrease (C), which is a direct effect of the shock. Finally, with decreased demand for loanable funds, the real interest rate is likely to fall (D) as there is less competition for borrowing money. Therefore, all of the statements (A, B, C, D) are expected outcomes according to real business cycle theory, making E correct.

Suppose That a Severe Shock That Decreases the Demand for Loanable