Real business cycle theory contends that the:
A) aggregate supply curve is vertical, and it shifts to the left in a recession.
B) aggregate demand curve is vertical, and it is the main factor that causes the business cycle.
C) aggregate supply curve is horizontal, indicating that business cycles have been stabilized.
D) aggregate demand curve is downward sloping, which shows that productivity growth is slowing down, causing the business cycle.

Question

Quizplus · Accepted Answer

Real business cycle theory argues that business cycles result from changes in productivity and technology shocks. This theory suggests that changes in aggregate supply, rather than aggregate demand, are the primary cause of business cycles. In this view, the aggregate supply curve is vertical, indicating that changes in real output are driven by changes in productivity, and shifts to the left in a recession. Therefore, option A is the correct choice. Option B is incorrect as it describes a view that is opposed to real business cycle theory. Option C is incorrect as it suggests that business cycles have been eliminated, which is not in line with real business cycle theory. Option D is incorrect as it describes a scenario that is not related to real business cycle theory.

Real Business Cycle Theory Contends That The