Question

According to the real intertemporal model, suppose there is an increase in the current capital stock....

According to the real intertemporal model, suppose there is an increase in the current capital stock. If so, we would expect

A.

real wages to rise and real interest rates to fall.
B.
real wages to fall and real interest rates to rise.
C.
real wages and real interest rates to both rise.
D.
real wages and real interest rates to both fall.

According to the real intertemporal model, suppose there is a decrease in current total factor productivity. If so, we would expect

A.
Output demand to decrease and labor demand to decrease.
B.

Output demand to increase and labor demand to increase.
C.

Output demand to decrease and no change to labor demand.
D.
No change to output demand and labor demand to decrease.
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Answer #1

1) Option a) real wages to rise and real interest rates to fall.

According to the real intertemporal model, suppose there is an increase in the current capital stock. If so, we would expect real wages to rise and real interest rates to fall. An increase in the current capital stock decreases the real interest rate, increases the real wage, increases consumption and decreases investment.

2) Option a) output demand to decrease and labor demand to decrease.

According to the real intertemporal model, suppose there is a decrease in current total factor productivity. If so, we would expect output demand to decrease and labor demand to decrease. A decrease in the current TFP results in interest rate to increase which decreases employment, wages and output.

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