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A Real Business Cycles Model

The Labor vs. Consumption Diagram

Production Function

Output is a function Y = f(K,N) of labor N, where K is taken to be fixed.  Labor is given by N = 24 - Leisure, where Leisure is time not devoted to labor.  The Classical Model uses the same production function, but the real business cycles approach does not extend the analysis to a demand for labor based on the wage rate and the price level.

production function

Indifference Curves

The agent does not receive utility from labor, but would rather not supply labor.  We can convert this situation into a more normal untility maximization problem by expressing the utility function in terms of leisure and consumption:  U = U(leisure,consumption).   The supply of labor is based on the same utility function, but here we will not need the wage rate.

EconModel

The EconModel presentation illustrates the "Robinson Crusoe" interpretation popularized by Robert Barro, Macroeconomics.

Building Blocks

The EconModel presentation explains the following curves:

Production function

Indifference curves for consumption and leisure

Analysis

The EconModel presentation analyzes the effects of changes in:

Technology shocks

There are two basic points.  First, technology shocks can cause business cycles.  Second, monetary shocks (and other nominal shocks) cannot cause business cycles because there are no nominal variables in the model.

Extensions

Barro's Robinson Crusoe Model also extends the present analysis.

References

Real Business Cycles, Wikipedia.

Robert Barro, Macroeconomics, emphasizes the role of real business cycles.


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