The equilibrium effects of a temporary increase in total factor productivity include
A) an increase in the real wage and an increase in the real interest rate.
B) an increase in the real wage and a decrease in the real interest rate.
C) a decrease in the real wage and an increase in the real interest rate.
D) a decrease in the real wage and a decrease in the real interest rate.
E) only a decrease in the real interest rate.

Question

Quizplus · Accepted Answer

An increase in total factor productivity leads to an increase in output per worker, which increases the marginal product of labor and thus raises the real wage. At the same time, the increased output and profitability of firms leads to an increased demand for investment, driving up the real interest rate. Therefore, there is an increase in the real wage and a decrease in the real interest rate.

The Equilibrium Effects of a Temporary Increase in Total Factor