Final answer:
Criticism of real business cycle theory includes its failure to explain wage stickiness and its overemphasis on technology shocks as the primary driver of productivity changes, overlooking the impact of changes in aggregate demand and the complexity of labor markets and unemployment.
Step-by-step explanation:
One criticism of real business cycle theory is that, contrary to its assumptions, real business cycle theory fails to adequately explain the sticky nature of money wage rates. Real business cycle theory postulates that economic fluctuations are primarily due to technology shocks that affect productivity, rather than changes in aggregate demand. This view is contested by critics who argue that the theory does not align well with empirical observations of wage stickiness. In practice, nominal wages often demonstrate downward inflexibility, which the real business cycle theory does not account for, leading to questions about the theory’s ability to explain certain labor market phenomena and recessions.
The Keynesian economics model, on the other hand, incorporates the importance of aggregate demand as well as a certain degree of wage and price rigidity to explain business cycle fluctuations. Keynesians assert that changes in aggregate demand can influence employment and output significantly, particularly in the short run, while the real business cycle theory overlooks these dynamics.
Moreover, another common criticism is that the real business cycle theory cannot fully explain the persistence of unemployment. The theory assumes that all unemployment is voluntary, resulting from workers choosing not to work at the prevailing wages. However, critics argue that this doesn’t capture the full complexity of labor markets and unemployment, including the involuntary unemployment and cyclical unemployment that rise and fall with the business cycle.