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The Real business cycle (RBC)

Real Busiess Cycle Theory (RBC) explains why there are fluctuations in businesses.
RBC model ignores the role of monetary forces and believe, like the classical economist, that money is veil. They insist that Production, supply shocks etc are the real forces behind the fluctuations, and they play down the role of demand side factors of the economy. RBC theory emphasis on relative prices rather than actual prices, believes that money is neutral, and also because it lays emphasis on supply side forces, this theory displays similarity with the earlier classical theorist of growth and development. It is for this reason RBC theory is sometimes put together with some other theories and dubbed 'Neo Classical'.

Real business cycle theory RBC theory

There can be several kind of shocks in the economy. these shock can originate on the demand side as well as on the supply side or shocks can originate from the monetary or fiscal policies. The RBC theorist focus on the Productivity shocks. Productivity shocks can be of several types. There can be development of new techniques of production, new management practices , crop failure and supply shocks coming from outside the economy, and so on. Basically a business cycle has to describe the nature of shocks to the system, and has to explain how these shocks affect the key variables like output, employment, etc. RBC models not only look at productivity shocks but also focus more propagation of shocks to the rest of the economy than other theories. 

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