The Theory of Real Business Cycles all prices flexible,even in short run implies money is neutral,even in short run classical dichotomy holds at all times fluctuations in output,employment,and other variables are the optimal responses to exogenous changes in the economic environment-natural rate is fluctuating productivity shocks are the primary cause of economic fluctuations• The Theory of Real Business Cycles • all prices flexible, even in short run – implies money is neutral, even in short run – classical dichotomy holds at all times • fluctuations in output, employment, and other variables are the optimal responses to exogenous changes in the economic environment - natural rate is fluctuating • productivity shocks are the primary cause of economic fluctuations