Real Business Cycle Theory
Real Business Cycle Theory In this paper I will be discussing the theory of real business cycle theory. A neoclassical economist named John Muth derived this theory in 1961. The theory itself defines business cycles in a series of shocks to the economical system. It describes the causation of fluctuations in the business cycle from real activity to monetary conditions, not reversed. A business cycle is medium term movements in economic activity that persist over several quarters or couple years. There are two sides to the story behind the real business cycle theory because there are many economists that dismiss this it and its propositions. I will try to touch on the main thoughts behind this theory as well as why it may be an incorrect way at looking at business cycles. ... This part of the theory describes the voluntary unemployment of workers during recessions. ... Critics of the real business cycle theory would say that wage and price stickiness could explain involuntary unemployment in times of recession. A real world example of this choice would occur when a worker is forced to take a cut in pay because of a corporate restructuring of his job description. Proponents of the RBC would be inclined to think that this worker would intentionally work less time because of his loss in real wage. ... The critics of RBC theory would probably be lead to believe that this worker would stay at a low level of production until conditions in the economy improved. The second way that the RBC theory varies from the other ways of thought is the random shock variables that cause shifts in the business cycle. ... This revolution is called the computer revolution and it changed the way business is conducted around the world.