The behaviour of the Solow residual suggests that when current total factor productivity increases
A) it becomes more difficult to predict future total factor productivity.
B) future total factor productivity is also likely to increase.
C) such increases are temporary, so we can draw no conclusions about the likely behaviour of future total factor productivity.
D) future total factor productivity is likely to decrease.
E) are typically temporary and have no influence on future levels of aggregate real GDP.

Question

Quizplus · Accepted Answer

The Solow residual is the part of output growth that cannot be explained by the growth in inputs of capital and labor. Hence, an increase in current total factor productivity suggests that there is potential for future growth beyond what can be explained by the growth in inputs alone. Therefore, option B is correct; an increase in current total factor productivity is likely to result in an increase in future total factor productivity.

The Behaviour of the Solow Residual Suggests That When Current