How many of the following business cycle facts can be explained if the primary cause of business cycles is temporary changes in total factor productivity: procyclical consumption,procyclical investment,procyclical employment,and procyclical real wages?
A) one
B) two
C) three
D) four

Question

Quizplus · Accepted Answer

All four facts can be explained if the primary cause of business cycles is temporary changes in total factor productivity.

Procyclical consumption: If total factor productivity increases, businesses may become more profitable, leading to increased hiring and higher wages. This can boost household income and increase consumption. The opposite can also be true during a downturn.

Procyclical investment: Increases in total factor productivity can lead to higher profits, which can be reinvested into the business to fund growth and expansion. Conversely, a downturn in total factor productivity can lead to decreased profits and reduced investment.

Procyclical employment: Increases in total factor productivity can lead to increased demand for labor, leading to higher employment levels. When total factor productivity declines, labor demand may decrease, leading to decreased employment levels.

Procyclical real wages: Increases in total factor productivity can lead to increased demand for labor, which can put upward pressure on real wages. Conversely, a decrease in total factor productivity can lead to lower demand for labor, leading to decreased real wages.

How Many of the Following Business Cycle Facts Can Be