CFA Level I · CFA Level I Exam · Understanding Business Cycles
An economist argues that business cycles arise mainly because firms and households react to random changes in technology, and that output fluctuations are the efficient response of rational agents to these changes. This view is most consistent with which school of thought?
The view is most consistent with real business cycle theory. RBC models explain fluctuations as efficient responses by rational households and firms to real shocks, especially technology shocks, rather than as results of demand shortfalls or monetary disturbances, which other schools emphasize.
- ANeoclassical
- BReal business cycle (RBC)Correct
- CKeynesian
Explanation
Real business cycle theory attributes fluctuations to real shocks, mainly technology, and treats the resulting output changes as efficient responses by rational agents. Keynesian theory instead stresses sticky wages and prices and demand shortfalls. Neoclassical theory views the economy as self-correcting and does not attribute cycles chiefly to technology shocks.
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