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

Question

Quizplus · Accepted Answer

The Solow residual measures the portion of economic growth not explained by changes in capital and labor inputs, which is attributed to total factor productivity. Therefore, an increase in current total factor productivity suggests that there is a higher likelihood that future total factor productivity will also increase. Option A and B are incorrect as they suggest that these increases are temporary and have no influence on the future, which is not necessarily true. Option C is incorrect as an increase in total factor productivity would not necessarily make it more difficult to predict future levels. Option D is incorrect for the same reason as option A and B.

The Behaviour of the Solow Residual Suggests That When Current