According to real business cycle theory, an increase in productivity _______ the demand for loanable funds, _______ the demand for labour, and _______ the supply of labour.The real interest rate will _______.
A)increases; increases; does not change; rise
B)increases; increases; does not change; fall
C)increases; increases; increases; rise
D)decreases; decreases; decreases; fall
E)increases; increases; increases; fall

Question

According to real business cycle theory, an increase in productivity _______ the demand for loanable funds, _______ the demand for labour, and _______  the supply of labour.The real interest rate will _______.
A)increases; increases; does not change; rise
B)increases; increases; does not change; fall
C)increases; increases; increases; rise
D)decreases; decreases; decreases; fall
E)increases; increases; increases; fall

Quizplus · Accepted Answer

According to real business cycle theory, an increase in productivity will increase the demand for loanable funds as firms invest in more productive projects. This will also increase the demand for labor as firms hire more workers to produce more output. As the demand for labor increases, workers may also choose to supply more labor in order to take advantage of higher wages. This increase in labor supply may partially offset the increase in wages due to the higher demand, leading to a smaller increase in wages than would occur in a simple supply and demand model. Therefore, the supply of labor may increase somewhat, but not as much as the demand for labor. Finally, as the demand for loanable funds increases, the real interest rate will rise as the market equilibrates supply and demand.

According to Real Business Cycle Theory, an Increase in Productivity