According to the real business cycle theory,the supply side shock from dramatic increases in oil prices in the 1970s led to higher unemployment because
A)when the real wage,W/P,fell,workers chose leisure.
B)when the real wage,W/P,rose,workers chose leisure.
C)workers increase Pe.
D)None of the above.

Question

Quizplus · Accepted Answer

According to the real business cycle theory, supply-side shocks such as dramatic increases in oil prices lead to changes in the real wage (W/P). In this case, the shock would lead to a decrease in the real wage. As the real wage falls, workers may choose to consume more leisure time and work less, leading to higher unemployment. Therefore, the correct choice is A, as workers choose leisure when the real wage falls.

According to the Real Business Cycle Theory,the Supply Side Shock