How might real business cycle theorists respond to evidence of ...

[ashley]

How might real business cycle theorists respond to evidence of procyclical inflation?
 
  What will be an ideal response?

Question 2

Consider the two graphs above. Suppose that financial liberalization enables more businesses to access credit markets. This would ________ the desired level of the capital stock, as depicted in graph ________.
 
  A) increase; B
  B) increase; A
  C) decrease; B
  D) decrease; A

[prumorgan]

Answer to Question 1

Since the aggregate demand curve is negatively-sloped, changes in potential output should relate negatively to inflation. Rising potential (actual) output should put downward pressure on prices, while negative productivity shocks should force prices up. Defenders of real business cycle theory may point to evidence that inflation is not consistently procyclical. Also, if aggregate demand shifts are correlated with changes in potential output, that might account for procyclical changes in inflation.

Answer to Question 2

A