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

Question

Quizplus · Accepted Answer

According to real business cycle theory, a decrease in the demand for loanable funds leads to a fall in the real interest rate (A), which can reduce the incentive to work, leading to fewer hours worked (B). Additionally, the real wage rate may fall due to decreased demand for labor (C), and the demand for loanable funds will decrease as stated (D).

Suppose That a Severe Shock That Decreases the Demand for Loanable