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    Suppose that the business cycle in the United States is best described by RBC theory. An advance in technology increases productivity.

    a. Draw a diagram to show the effect of the advance in technology in the market for loanable funds.
    b. Draw a diagram to show the effect of the advance of technology in the labor market.
    c. What is the when-to-work decision when technology advances?

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    Solution Preview

    Real business cycle theory posits that the business cycle is driven by sudden changes in productivity. This question is designed to help you see how this process works.

    a. See the attached file "RBC". We can picture the supply of loanable funds as a upward sloping curve, directly related to the interest rate. We see the demand of loanable funds as the downward sloping investment function, because investment ...

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    This solution discusses the business cycle.

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