Answer to Question #252850 in Economics for Tenn

Question

Please explain in three well-structured paragraphs the basic arguments stated by the Real-Business-Cycle (RBC) Theory, regarding economic fluctuations.

Answer 1

The main theory of the real business cycle is the following.

1. The economy is competitive with flexible prices, which in the long run ensures a state of macroeconomic equilibrium at the level of full employment.

2. Expectations are formed rationally, there is no information asymmetry.

3. Fluctuations in aggregate output are predominantly associated with technological change, and various mechanisms spread the influence of the impulse.

4. It is assumed that work and leisure replace each other in time. Unemployment that appears during voluntary, in the long run for a long period, full employment of resources.

In the theory of the real business cycle. Intertemporal effect for labor damage. Explaining the output of the real economic cycle requires a toolbox of other models that elicit a response from real economic indicators. Technological shifts represent a significant impact on the labor market, which is described using the model of intertemporal labor damage by R. Lucas and L. Rapping. According to the provisions of this model, the employee maximizes the utility function, which depends not only on consumption but also on leisure. At the same time, the employee is in a state of choice not only between current consumption and leisure.

If an employee expects an increase in his income (real wages wt + 1), then in the current period (period t) he will prefer to reduce his working time in leisure. If an employee expects a period of wage reduction in the next period (period t + 1), then most likely he will prefer to increase the individual labor supply in the current period by sacrificing leisure hours. Thus, periods of increasing employment alternate with periods of decreasing t. This effect is called the intertemporal effect for damage in the supply of labor.