Author Question: What is Real Business Cycle Theory? What drives business cycles in this model? Where do these shocks ... (Read 92 times)

mia · **on:** Jun 30, 2018

What is Real Business Cycle Theory? What drives business cycles in this model? Where do these shocks come from?

What will be an ideal response?

Question 2

Distinguish between investment goods and consumption goods. If you buy a car, is it investment or consumption? What if IBM buys a car? Are inventories a consumption or investment good?

What will be an ideal response?

nekcihc358 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

In the Real Business Cycle Theory, changes in output are driven by changes in technology, which change aggregate supply. The changes in technology can be driven by new inventions, natural disasters, changes in the public's preferences for work, discoveries of natural resources, or government regulations and taxation which affect both firm's and worker's incentives to produce.

Answer to Question 2

Investment goods include the purchase of capital by firms and the purchases of homes by households. A car purchased by an individual is consumption, a car purchased by IBM is an investment good. Inventories are counted as an investment good.