Suppose that the business cycle in Canada is best described by RBC theory. An advance in technology increases productivity. The when-to-work decision depends on the real interest rate. The ________ the real interest rate, other things remaining the same, the ________ is the supply of labour today. RBC theorists believe the when-to-work effect is ________.
A)lower; smaller; small
B)higher; smaller; small
C)higher; larger; large
D)lower; larger; large
E)higher; larger; small

Question

Quizplus · Accepted Answer

RBC theory suggests that an increase in real interest rates causes an increase in labour supply today as individuals will work more to save and invest for the future. Therefore, choice C is correct. Additionally, RBC theorists generally believe that the when-to-work effect is large, suggesting that small changes in real interest rates can result in significant changes in labour supply.

Suppose That the Business Cycle in Canada Is Best Described