Two business cycle facts that are less easily explained by the real business cycle are that
A) money and prices are both acyclical.
B) the nominal money supply is procyclical and leads the business cycle.
C) the nominal money supply is procyclical and is coincident with the business cycle.
D) the nominal money supply is procyclical and lags the business cycle.
E) the nominal money supply is procyclical and is a leading indicator.

Question

Quizplus · Accepted Answer

Real business cycle theory suggests that changes in technology, productivity, and other supply-side factors drive the business cycle. However, the procyclical behavior of the nominal money supply is not easily explained by this theory. In fact, empirical evidence shows that the money supply is often a leading indicator of the business cycle, with increases in the money supply preceding economic expansions, and vice versa. This suggests that monetary factors, such as changes in interest rates and credit availability, play an important role in driving the business cycle. Moreover, the fact that money and prices are both acyclical (choice A) is not inconsistent with real business cycle theory, as it focuses on real, not nominal, variables. Finally, the timing of changes in the money supply (choices C, D, and E) is debated among economists, but the consensus is that it is procyclical, meaning it moves with the business cycle rather than leading or lagging it.

Two Business Cycle Facts That Are Less Easily Explained by the Real