Question

1. Which of the following is an assumption of real business cycle theory? A prices or...

1. Which of the following is an assumption of real business cycle theory?

A prices or wages are sticky (inflexible);
B money’s velocity is stable and predictable
C technology (supply-side) shocks are the primary cause of business cycles
D

business cycles are caused by a mismatch in timing between savings, investment, and consumption

2. Which of the following is an assumption of New Keynesian theory?

A prices or wages are sticky (inflexible)
B money’s velocity is stable and predictable
C technology (supply-side) shocks are the primary cause of business cycles
D business cycles are caused by a mismatch in timing between savings, investment, and consumption
Business   Economics   
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Answer #1

1) Solution: technology (supply-side) shocks are the primary cause of business cycles

Explanation: The real business cycle theory makes the fundamental assumption that the primary cause of business cycles are due to technology shocks.

2) Solution: prices or wages are sticky (inflexible)

Explanation: New Keynesian theories assumes on the stickiness of prices and wages to explain why monetary policy has such a strong influence on economic activity and why involuntary unemployment exists.

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