Challenges
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.
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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Challenges