If the real interest rate is 4 percent and workers expect real wages to be 2 percent year higher next year, according to real business cycle theory, workers will work
A) more this year and less next year.
B) less this year and less next year.
C) more this year and more next year.
D) less this year and more next year.

Question

Quizplus · Accepted Answer

According to real business cycle theory, if workers expect their real wages to be higher next year (due to a 2 percent increase), but the real interest rate is currently 4 percent, they would prefer to work more this year when the return on savings (due to the higher interest rate) is greater, and plan to work less next year when their wages are higher. This is because they can save the extra income earned this year at a high interest rate, which increases their future purchasing power.

If the Real Interest Rate Is 4 Percent and Workers