In the real business cycle model,a persistent increase in total factor productivity
A) increases the real wage and increases the price level.
B) increases the real wage and decreases the price level.
C) decreases the real wage and increases the price level.
D) decreases the real wage and decreases the price level.

Question

Quizplus · Accepted Answer

In the real business cycle model, a persistent increase in total factor productivity leads to an increase in output and real wages, as firms can produce more goods with the same amount of input. However, the increased production leads to a decrease in the marginal product of labor, which eventually leads to a decrease in the real wage. Meanwhile, the increase in output leads to a decrease in the price level, as the supply of goods increases. Therefore, option B is the best choice as it correctly identifies the relationship between total factor productivity, real wages, and the price level.

In the Real Business Cycle Model,a Persistent Increase in Total