Refer to the graph. Assume that the economy was initially in equilibrium at point A. If there is a signiﬁcant technological innovation in the economy, then according to real-business-cycle theory,
Aggregate
A) demand will shift, which constitutes the full extent of the volatility.
B) demand will shift, which causes a corresponding shift in aggregate supply.
C) supply will shift, which causes a corresponding shift in aggregate demand.
D) supply will shift, but such shifts are very rare in the real economy.

Question

Refer to the graph. Assume that the economy was initially in equilibrium at point A. If there is a signiﬁcant technological innovation in the economy, then according to real-business-cycle theory,
Aggregate
A) demand will shift, which constitutes the full extent of the volatility. 
B) demand will shift, which causes a corresponding shift in aggregate supply. 
C) supply will shift, which causes a corresponding shift in aggregate demand. 
D) supply will shift, but such shifts are very rare in the real economy.

Quizplus · Accepted Answer

According to real-business-cycle theory, a significant technological innovation will cause a shift in aggregate supply, which in turn causes a corresponding shift in aggregate demand. This is because the new technology allows firms to produce goods at a lower cost, which increases their profitability and allows them to lower prices, leading to a higher quantity of goods demanded. Therefore, the correct answer is choice C.

Refer to the Graph