In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n):
A) Increase in aggregate demand by an equal amount, so real output would increase and the price level would be unchanged
B) Increase in aggregate demand by an equal amount, so real output and the price level would increase
C) Decrease in aggregate demand, so real output would increase and the price level would decrease
D) Decrease in aggregate demand, so real output and the price level would increase

Question

Quizplus · Accepted Answer

Real-business-cycle theory asserts that changes in aggregate supply are typically exogenous shocks, such as changes in productivity or technology. An increase in long-run aggregate supply would lead to an increase in real output and a decrease in prices in the long run, and would not cause any change in aggregate demand. Therefore, only choice A is correct as it suggests an increase in aggregate demand by an equal amount, leading to an increase in real output, but with no change in price level.

In the View of Real-Business-Cycle Theory, an Increase in the Long-Run