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?
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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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