Theory Analysis of Total Factor Productivity, Real Business Cycle Model and Economic Policy
Anyalezu, N. Kirk Guthlac

This paper analyses the theoretical importance of macroeconomic variables and the response to shocks. It explains the technological disturbances (or supply) as the main source of macroeconomic fluctuations given rational choice and perfectly flexible prices. Furthermore, the analysis assume productivity disturbances motivate rational agents to adjust savings and investment to smooth consumption and to adjust employment in response to changes in relative price of leisure and the productivity of labor in real business cycle (RBC) models. In addition, the assumption of capacity utilization is deemed endogenous thereby give rise to a gap between true technology shock (non-observable) and total factor productivity (TFP) measures (Observable). This study evaluates the economic policy effects with respect to labor, productivity and technology shocks.

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