The Real Bussiness Cycle

In conventional models, supply shocks come from big changes in the prices of inputs such as oil. However, there aren¡¦t enough of these to explain all the variation in GDP or unemployment, so the RBC model a

Evidence suggests that in the long run, labor supply is highly inelastic. However, the RBC model can still work if people are willing to substitute labor for leisure (and vice versa) in the short run. For example, Sheila might spend 11 months a year working and the other month goofing off regardless of what the wage is, but she will time her vacation to come in the month when she will be least productive. In other words, she responds to a negative technology shock by reducing her labor supply because she isn¡¦t especially concerned about the timing of work and leisure.

The MPL is the first derivative of the firm¡¦s output function with respect to labor. The typical output function is AKaL1-a, so the MPL is aAKaL-a. Notice that the MPL falls as L rises; this illustrates diminishing returns. If we increase the technology parameter A, then for any given real wage the profit-maximizing firm will hire more

Some topics in this essay:
, Notice MPL, rbc model, ld curve, business cycle, AKaL1-a MPL, labor supply, marginal revenue product, rbc model assumes, substitute labor leisure, revenue product labor, labor leisure, employment labor, model assumes, technology shock, substitute labor, diminishing returns, prices adjust automatically,