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
E) none

Question

Quizplus · Accepted Answer

Temporary changes in total factor productivity can explain all four facts: procyclical consumption, investment, employment, and real wages. When total factor productivity increases, businesses are able to produce more with the same amount of inputs, leading to an increase in output and income. This increase in income leads to higher consumption and investment. Firms also need to hire more workers to produce more output, leading to an increase in employment. As demand for workers increases, wages also tend to rise, leading to procyclical real wages. Conversely, when total factor productivity decreases, the opposite effects are observed.

How Many of the Following Business Cycle Facts Can Be