420 Ch 12

420 Ch 12 - 12.1 Real Business Cycle Models RBC Model is...

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12.1 Real Business Cycle Models RBC Model  is sometimes referred to as the second generation of new classical models Central Features: Like New Classicalist, RBC also agree that: Agents Optimize Markets Clear The Keynesian model includes involuntary unemployment. In Real business cycle  models, as in new classical models, all unemployment is voluntary.  Real Business Cycle  theorists depart from their agreement with New Classicalists in  the  causes of fluctuations in output and employment: Shocks to technology Variation in real environmental conditions Changes in real (relative) prices of raw materials And changes in tax rates. And change in individual preferences Unlike Classicalists who believe that factors  change slowly over time, RBCs argue that  these supply-side variables are also the source of short-run fluctuations in output and  employment.  RBCs believe that errors in predicting AG can explain large and costly  fluctuations in output ultimately violates the idea that agents optimize.  One interpretation of RBC factors,  real supply-side factors are simply more important  than nominal demand-side influences. Stronger than New Classicalists,  RBCs say that monetary and other nominal  demand-side shocks have  NO  significant effect on output and employment.  Simple RBC Model RBCs view Aggregate economic variables as the outcomes of the decisions made by  many individual agents acting to maximize their utility subject to production possibilities  and resource constraints.  Unlike previous production functions depending on the level of capital and labor, R
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420 Ch 12 - 12.1 Real Business Cycle Models RBC Model is...

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