Chapter 35, Problem 5MCQ

To determine

The correct option which specifies fluctuations in total factor productivity growth cause the business cycle

Answer to Problem 5MCQ

From the available options, the correct option is real business cycle.

Explanation of Solution

According to Real business cycle theory, the vertical aggregate supply curve shifts is the result of variations in total factor productivity growth, which in turn causes fluctuations in the business cycle. It means the correct option is d (real business cycle) as real business cycle supports by offering an integrated method for understanding the theory of growth and fluctuations but

Keynesian model would not be vertical because the prices can rigid, the classical model shows changes in money supply, rational expectations is based on utilization of all information to make decisions, and natural rate states that inflation rate would not remain steady until the unemployment rate reaches its natural level and it does not specify business cycle.

Economics Concept Introduction

Introduction: Real-business-cycle theory depicts that changes in technology lead to changes in output and employment because the economy's capacity to transform inputs into outputs fluctuates.