The equilibrium effects of a temporary increase in total factor productivity include
A) an increase in the real wage and an increase in the real interest rate.
B) an increase in the real wage and a decrease in the real interest rate.
C) a decrease in the real wage and an increase in the real interest rate.
D) a decrease in the real wage and a decrease in the real interest rate.

Question

Quizplus · Accepted Answer

An increase in total factor productivity would lead to an increase in output and, in turn, an increase in the demand for labor. This would lead to an increase in the real wage. However, the increase in output would also increase the demand for loanable funds, which would lead to an increase in the real interest rate. Therefore, a temporary increase in total factor productivity would lead to an increase in the real wage and a decrease in the real interest rate.

The Equilibrium Effects of a Temporary Increase in Total Factor