Measurement errors of changes in the Solow residual during recessions are most likely caused by
A)underutilization of capital, but not of labour.
B)constant real wage rate.
C)mismeasurement of real GDP.
D)underutilization of labour, but not of capital.
E)underutilization of labour and capital.

Question

Quizplus · Accepted Answer

The Solow residual measures productivity growth in an economy, assuming constant returns to scale and full utilization of inputs. During recessions, both labour and capital are often underutilized, leading to measurement errors in the Solow residual. This underutilization means that the actual productivity might be higher or lower than what the Solow residual suggests, as the model assumes full employment of these resources.

Measurement Errors of Changes in the Solow Residual During Recessions