Answer to Question #293384 in Macroeconomics for Ali

Question

What is the theory of Real Business Cycle Economists?

Answer 1

Solution:

The Theory of the Real Business Cycle Economists states that macroeconomic fluctuations in the economy can be largely explained by technological shocks and changes in productivity.

These changes in technological growth have an impact on firm investment and worker decisions (labor supply). As a result, changes in output can be traced back to microeconomic and supply-side factors.

Real business cycle theory is founded on a simple neoclassical model of capital accumulation in which individuals seek to invest in capital and the price of labor is determined by market forces. Thus, under a wide range of conditions, work effort, investment, and output will converge to a steady rate.

 

Throughout an economy's life, it experiences a number of business cycles. These business cycles include periods of high or even low economic activity. A business cycle consists of economic expansion, recession, trough, and recovery periods. The length of such stages may differ from case to case.