Question

In the real business cycle theory, during a period when output is falling

a.   workers are voluntarily giving up their jobs.

b.   the quantity supplied of labor is falling.

c.   aggregate productivity must be falling.

d.   all of the above.

e.   none of the above.

Explain answer briefly.

Answer 1

In the real business cycle theory, during a period when output is falling workers are voluntarily giving up their jobs, the quantity supplied of labor is falling, aggregate productivity must be falling.

According to this theory, output and employment fall during recessions because the available production technology deteriorates, which reduces output and the incentive to work. Real-business-cycle model assumes that wages do not adjust to equilibrate labour demand and supply if people were voluntarily choosing not to work in recessions, they are not, in fact, unemployed.

Therefore, the answer is (D) all of the above.