According to real business cycle theory, which factor is responsible for economic growth?

• A. Positive shifts in the AS curve
• B. Trade and income policies
• C. Positive shifts in the AD curve
• D. Expansionary fiscal and monetary policies

Answer: (A)

In real business cycle theory, sustained growth comes from real factors that increase the economy’s ability to produce goods and services. When productive capacity rises—think technological progress, better efficiency, or expanding resources—the economy can produce more at every price level. This shows up as a rightward shift in the supply side, the long-run aggregate supply. That’s why growth is driven by positive shifts in the AS curve: these shifts reflect improvements in the economy’s productive capability, not just an uptick in demand.

Shifts in aggregate demand, or expansionary fiscal and monetary policy, can push output up in the short run, but RBC theory holds that they don’t generate lasting growth in the long run. Similarly, demand-driven growth (positive shifts in AD) isn’t what RBC emphasizes as the source of sustained increases in output. Trade and income policies, while potentially affecting efficiency, aren’t the primary mechanism RBC uses to explain long-run growth, which centers on real supply-side improvements like technology and productivity gains.

So the best explanation is that growth comes from positive shifts in the AS curve, reflecting gains in productive capacity.