Question: In the real business cycle model, suppose that temporary increases in government spending lead to permanent increases in total factor productivity (that is, both current
In the real business cycle model, suppose that temporary increases in government spending lead to permanent increases in total factor productivity (that is, both current and future total factor productivity increase), perhaps because some government spending improves infrastructure and makes private firms more productive. Temporary shocks to government spending of this type would typically lead to business cycles consistent with the key business cycle facts
A.
if, taken separately, all of the effects of the increase in total factor productivity are stronger than all of the effects of the increase in government spending.
B.
if, taken separately, all of the effects of the increase in government spending are stronger than all of the effects of the increase in total factor productivity.
C.
under any circumstances, regardless of whether, taken separately the effects of the increase in government spending were stronger or weaker than the effects of the increase in total factor productivity.
D.
under no circumstances.
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