Answer to Question #47836 in Macroeconomics for Tawana McGee

Question

Using the real business cycle theory, explain two(2) effects of an adverse technological shock on the labor market and on the output market.

Answer 1

Technology shocks are events in a macroeconomic model, that change the production function. Usually this is modeled with an aggregate production function that has a scaling factor.
A technology shock affects an industry or firm's productivity, this may be a positive shock—increasing the output for a given set of inputs, or a negative shock—decreasing the output for a given set of inputs. Negative shocks are much less common than positive shocks as technology rarely moves backwards.
Real business cycle theory (RBCT), is the theory where any type of shock has a ripple effect into many other shocks. To relate this to current times the upward price on oil is a RBCT because of the negative technology shock that happened due to the raise in price for the process of extracting of the oil. Now due to this increase in price for energy to extract the oil, less people could afford oil which drove economic activity down and at the same time lessens a countries national GDP. Typically, a RBCT starts with a negative type of shock, which is why the RBCT is becoming less and less relevant in today's economics. More and more economists are arguing against the RBCT because very rarely can you have a negative shock on technology with the amount of advancements we are going through now.