In the real business cycle framework, long-run growth is attributed to which factor?

• A. Positive shifts in the AS curve
• B. Negative shifts in the AD curve
• C. Fiscal expansion
• D. Monetary stimulus

Answer: (A)

In real business cycle theory, long-run growth comes from improvements in the economy’s productive capacity, driven by technology progress and efficiency gains. When technology advances, the production function shifts upward, meaning the same inputs can produce more output. This outward shift in potential output is represented as a positive shift in the aggregate supply, signaling sustained growth over time.

The other ideas reflect demand-side actions or short-run fluctuations, which RBC theory treats as having little to no effect on the long-run growth path. Demand-focused policies like fiscal expansion or monetary stimulus can influence short-run output but do not generate lasting increases in the economy’s productive capacity in this framework. Negative shifts in aggregate demand reduce output in the short run, not the source of long-run growth.