EcoWeek7LJ.docx - Please explain in three well-structured...

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Please explain in three well-structured paragraphs the basic arguments stated by the Real-Business- Cycle (RBC) Theory, regarding economic fluctuations. The real business cycle theory has been evolved out of the American new classical school of 1980s. It is the outcome of research mainly by Kydland and Prescott, Barro and King, Long and Plosser, and Prescott. Later, Plosser, Summers, Mankiw and many other economists gave their views of the real business cycles. They view aggregate economic variables as the outcomes of the decisions made by many economic agents acting to maximize their utility subject to production possibilities and resource constraints. Their views mainly relate to technology shocks, labour market, interest rate, role of money, fiscal policy, prices and wages in business cycles. They are explained below The theory of real business cycles explains short-run economic fluctuations based on the assumptions of the classical theory. According to this theory, business cycles are the natural and efficient response of the

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