Question

In the one-period model in Chapter 5, an increase in total factor productivity 

• reduces consumption, increases output, and increases the real wage. 

• increases consumption, increases output, and increases the real wage. 

• reduces consumption, reduces output, and reduces the real wage. 

• reduces consumption, increases output and reduces the real wage.

Answer 1

Correct Answer:

B

Explanation:

When total factor productivity increases, then it decreases the cost of production and supply curve shifts to the right. It increases output, reduces the cost and consumption increases. At the same time, when total facto productivity increases, then demand for workers also increases and it increases their wage rates. So, real wage also increases in the economy.