According to the real business cycle theory, an increase in the price of a resource (such as oil), that decreases the demand for loanable funds will ________ employment and ________ real GDP.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

The real business cycle theory suggests that changes in the economy are primarily caused by changes in technology shocks or changes in productivity. Therefore, if the price of a resource such as oil increases, it is seen as a negative supply shock which reduces the productivity of firms and increases their costs of production. As a result, firms will reduce their output and decrease the demand for loanable funds. This will result in a decrease in employment and a decrease in real GDP.

According to the Real Business Cycle Theory, an Increase in the Price