Real Business Cycles - Intermediate Macro Exam 2

Question 1

According to real business cycle theory, negative real shocks initially affect _______.

Answer 1

Long run aggregate supply

Question 2

According to real business cycle theory, how can we avoid recessions?

Answer 2

Diversify the economy

Question 3

What are the weaknesses of real business cycle theory?

Answer 3

It doesn’t explain why unemployment is so high during recessions.
Can’t explain all business cycles, Only Negative Supply Shocks.

Question 4

Real Business Cycle Theory is all about…

Answer 4

Negative Supply Shocks

Question 5

What Created the 1973 Oil Crisis Negative Real Shock?

Answer 5

Increased Oil Prices - Leading to Increased Production Costs, Less items produced, Fewer workers hired, Lower incomes.
All create a shock to the rest of the economy, causing a recession.