Question

Provide a brief explanation of the general ineffectiveness of policy in counteracting business cycles in the RBC model.

Answer 1

ANSWER: It is very well known that real business cycle explains about the fluctuations of that particular business in its life cycle.The business cycle is derived from the technological shock.When the economy in a steady state, the business also has permanent technological stocks.The ineffecive policy of real business cycle explained in detailed below.

1)MONETARY POLICY:

Monetary policy is the policy which was started by the central bank for the purpose of managing the money supply and rate of interest.This policy mainly increases the liquidity to create economic growth.It doesnt get affected in the real business cycle model as the money is will be treated as a neutral here.

2)FISCAL POLICY:

Fiscal policy shows its effectiveness but upto more extent in the real business cycle model.Here The government has no role to play in the economy.Hence the business cycles are the efficient responses of the economy for the favoured and unfavoured technological shocks. Therefore by this we can say there is a effect of fiscal policy on the employment oppurtunities in the economy.