Real business cycle theory argues that the primary cause of business cycles is fluctuations in

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Real business cycle theory proposes that business cycles are primarily caused by fluctuations in total factor productivity, which means changes in the efficiency with which inputs are transformed into outputs. This theory argues that technological innovations and improvements in productivity can cause expansions, while downturns may be caused by adverse supply shocks, such as increases in oil prices or disruptions to the supply chain. Preferences, government spending and externalities may also play a role in business cycles, but they are seen as secondary factors in this theory.

Real Business Cycle Theory Argues That the Primary Cause of Business