Shocks to long-run aggregate supply can be a source of business fluctuations ________.
A)only in real business cycle models
B)only in new Keynesian models
C)in both real business cycle and new Keynesian models
D)only if the money supply rises

Question

Quizplus · Accepted Answer

Shocks to long-run aggregate supply can affect the potential output of an economy, leading to changes in output and employment in the short run. Both real business cycle (which focus on the supply side) and new Keynesian (which focus on the demand side) models recognize the importance of such shocks in explaining business fluctuations. The money supply is not directly related to long-run aggregate supply and therefore is not a determinant of business fluctuations in this context.

Shocks to Long-Run Aggregate Supply Can Be a Source of Business