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The real business cycle model All the models of the business cycle that we have used so far have assumed that wages and/or prices do not adjust automatically. As such the SRAS curve is not vertical, so changes in demand can affect output. The real business cycle (RBC) model assumes that wages and prices adjust automatically (there are no ¡§market failures¡¨), so the AS curve is vertical. As such, the AD curve has no effect on output. The business cycles that we observe are entirely due to shifts of the AS curve. Moreover, the large changes in unemployment that we observe during booms and busts are assumed to be voluntary¡Xthey result from rational responses to changes in economic conditions. In conventional models, supply shocks come from big changes in the prices of inputs such as oil. However, there aren¡¦t enough of these to explain all the variation in GDP or unemployment, so the RBC model a