If the real interest rate is 2 percent and workers expect real wages to be 4 percent higher next year, according to the real business cycle theory, workers will work
A) more this year and less next year.
B) less this year and less next year.
C) more this year and more next year.
D) less this year and more next year.

Question

Quizplus · Accepted Answer

According to the real business cycle theory, if workers expect their real wages to be higher next year, they are likely to work less this year (to enjoy more leisure when it is relatively more expensive) and more next year when their real wage is higher. This is because they anticipate being able to earn more for the same amount of work next year, making leisure relatively more costly this year.

If the Real Interest Rate Is 2 Percent and Workers