Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS_LR1. If the economy experiences a change in technology that increases productivity and resources, then real-business-cycle theory would suggest that this macroeconomic instability would eventually produce a new equilibrium at point: A) B B) C C) D D) E

Question

Quizplus · Accepted Answer

According to real-business-cycle theory, an increase in productivity and resources would lead to an increase in aggregate supply (AS). This shift in AS would cause the initial equilibrium point (U1B) to move to a new equilibrium point. Point C is unlikely since it represents an inflationary gap where output is above potential. Point D is also unlikely since it represents a recessionary gap where output is below potential. Point B, however, represents a new equilibrium where output has increased due to the increase in productivity and resources while price level remains relatively stable.

Refer to the Graph Above