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

Question

Quizplus · Accepted Answer

According to the real business cycle model, a decrease in the demand for loanable funds would lead to a fall in the real interest rate as the supply of loanable funds exceeds demand. This decrease in the real interest rate would make borrowing cheaper, potentially leading to a decrease in savings and investment. As a result, firms may reduce production, leading to a decrease in the demand for labor. This would cause both the real wage rate to fall and people to work fewer hours, as the decrease in demand for labor affects employment and wages. Therefore, all of the above statements are true in the context of the real business cycle model.

Suppose That a Severe Shock That Decreases the Demand for Loanable