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Word Count: 455
The author of Real Business Cycles A New Keynesian Perspective N Gregory Mankiw starts off by explaining that the main difference between the RBC and other schools of thought is what they believe creates fluctuations recessions and booms in the business cycles The RBC explains these changes in the economy as responses to the availability of production technology Mankiw discusses why he believes they have come to the wrong conclusion and further illustrates perceived weaknesses within the RBC school of thought The real business cycle theory argues that real variables in the economy are not affected by changes in nominal variables This dismisses any idea of money supply and price levelof labor as well as goods and services playing a serious role in the changes that occur within the economys cycle Instead supporters of the RBC rely on the assumption that there are large random fluctuations in the rate of technological change79 Mankiw says that the reason the RBC is so focused on technological disturbances is because other disturbances in the real economy would have no effect on the models that they have created Mankiw makes the point that over a typical business cycle consumption and leisure have an inverse relationship In a boom leisure declines and consequently consumption rises But using the reasoning of the RBC one should expect both consumption and leisure to move in a similar direction because both are considered normal goods This implies that the real wage which is defined as the price of leisure relative to goods is procyclical But with a consistent function of production a countercyclical real wage is produced that cannot account for the leisure and consumption fluctuations The RBC also uses the Solow Residual as evidence that technological disturbances are to blame for changes in the business cycle This attempts to measure technological progress by comparing the change in output with the change in input
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