According to Real Business Cycle theory,
A) lack of consumer confidence causes most business cycles
B) price fluctuations are unimportant because they affect nominal, not real GDP
C) recessions are an optimal response to negative technology shocks
D) fiscal policy is the most appropriate way to smooth out economic fluctuations
E) labor supply curves are extremely steep

Question

Quizplus · Accepted Answer

Real Business Cycle theory implies that changes in technology are the primary cause of business cycles, and that recessions are an optimal response to negative technology shocks. This is because the theory assumes that individuals and firms respond to changes in economic conditions in efficient ways, resulting in fluctuations in production, employment, and output over time. Therefore, Option C is the best choice. Option A is incorrect because Real Business Cycle theory does not consider consumer confidence to be a major factor in business cycles. Option B is also incorrect because price fluctuations are important for determining real GDP, as changes in prices can affect both the quantity and quality of goods and services produced. Option D is incorrect because Real Business Cycle theory suggests that fiscal policy may be ineffective in smoothing out economic fluctuations caused by changes in technology. Option E is also incorrect because labor supply curves are assumed to be relatively flat in Real Business Cycle theory, as individuals respond to changes in wages and employment opportunities in efficient ways.

According to Real Business Cycle Theory