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

Question

Quizplus · Accepted Answer

The Solow residual is a measure of total factor productivity, which represents the portion of output growth that cannot be explained by changes in inputs (capital and labor). When current total factor productivity increases, it suggests that there has been an improvement in the efficiency with which inputs are used to produce output. As a result, future total factor productivity is also likely to increase, since the technological and organizational changes that drive productivity growth tend to be cumulative and progressive in nature. Therefore, option B is the correct answer.

The Behaviour of the Solow Residual Suggests That When Current