According to the real business cycle theory, a supply shock, such as the oil sho

Question

According to the real business cycle theory, a supply shock, such as the oil shocks in the 1970s, leads to a reduction in aggregate supply. In the new long-run equilibrium unemployment is higher and the natural rate of unemployment is higher too. unemployment returns to its original level and workers are as well off as they were before the shock. unemployment is higher but the natural rate of unemployment is not higher. unemployment returns to its original level but workers are worse off because their real wages are lower.

Explanation / Answer

The correct answer is option (D).

According to the real business cycle theory, a supply shock, such as the oil shocks in the 1970s, leads to a reduction in aggregate supply. In the new long-run equilibrium, unemployment returns to its original level but workers are worse off because their real wages are lower.

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