Which of the following models appropriately explains the fluctuations in potential output and long-run aggregate supply by understanding the shocks to productivity or the willingness of the worker?
Show Hint
- Solow growth model
- Real business cycle model
- IS-LM model
- Harrod-Domar Model
The Correct Option is B
Solution and Explanation
The question asks which model explains fluctuations in potential output and long-run aggregate supply by understanding productivity shocks or the willingness of workers. The Real Business Cycle (RBC) model is the correct model for explaining such fluctuations. It focuses on how technology shocks (i.e., changes in productivity) and changes in labor supply affect potential output over time.
Step 2: Explanation of the options.
(A) The Solow growth model explains long-run economic growth but does not focus on fluctuations or productivity shocks in the short run.
(B) The Real Business Cycle model directly addresses fluctuations in potential output by considering shocks to productivity and labor supply. This is the correct answer.
(C) The IS-LM model primarily deals with short-run aggregate demand and does not focus on long-run aggregate supply or productivity shocks.
(D) The Harrod-Domar model is concerned with investment and economic growth, but it does not specifically address shocks to productivity or fluctuations in potential output.
Step 3: Conclusion.
The correct answer is (B) because the Real Business Cycle model is the one that explains fluctuations in potential output by considering shocks to productivity and labor supply.
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