In the real business cycle model, a persistent increase in total factor productivity
A) has no effect on the real interest rate.
B) unambiguously increases the real interest rate.
C) unambiguously decreases the real interest rate.
D) has a theoretically ambiguous effect on the real interest rate.
E) has a theoretically ambiguous effect on the nominal interest rate.

Question

Quizplus · Accepted Answer

In the real business cycle model, a persistent increase in total factor productivity can lead to higher output and investment demand, which may increase the real interest rate. However, it can also increase savings, which may decrease the real interest rate. Thus, the effect on the real interest rate is theoretically ambiguous.

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