In real business cycle models,an unfavorable supply shock
A) leads to an increase in the price level and a decline in real GDP.
B) causes the aggregate demand curve to shift to the left.
C) increases total output.
D) increases aggregate demand because price levels rise.
E) leads to significant decreases in long-term involuntary unemployment.

Question

Quizplus · Accepted Answer

Real business cycle models suggest that an unfavorable supply shock leads to a decrease in the level of productivity and an increase in production costs. This results in a decrease in real GDP and an increase in the price level due to a decrease in the aggregate supply.

In Real Business Cycle Models,an Unfavorable Supply Shock