An increase in total factor productivity in a closed economy

Question

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An increase in total factor productivity in a closed economy leads to an increase in labor demand because firms want to produce more due to higher productivity. This, in turn, increases the real wage as firms are willing to pay more for labor. Output increases because of higher productivity and labor input. The real interest rate decreases because the increase in output leads to more savings in the economy, which reduces the cost of borrowing.

An Increase in Total Factor Productivity in a Closed Economy