In the real business model, a persistent increase in total factor productivity causes
A) real wages to fall.
B) the price level to rise.
C) real interest rates to rise.
D) the output demand curve shifting less than the output supply curve.
E) the money supply to shift right.

Question

Quizplus · Accepted Answer

When there is a persistent increase in total factor productivity, the economy is able to produce more output with the same amount of inputs. This leads to a shift in the output supply curve to the right. As a result, the equilibrium price level may remain stable or even decrease, which contradicts option B. Similarly, an increase in productivity can lead to an increase in real wages (option A) and a decrease in real interest rates (option C), but these effects are not guaranteed as they depend on various other factors such as labor market conditions and monetary policy. Therefore, the most likely outcome of a productivity increase is a larger shift in the output supply curve than the output demand curve (option D). Option E is irrelevant as there is no direct relation between productivity and the money supply.

In the Real Business Model, a Persistent Increase in Total