Question

For TFP to be the primary cause of business cycles, what must hold with respect to substitution and income effects for leisure? Explain in the context of 1-period, closed economy model.

Answer 1

Ans.2. Total factor productivity means one factor can produce a certain level of goods at a particular point of time, it means the productivity can easily account with the production of the goods by a factor.
Yes it is true that total factor productivity is the primary cause of business cycles because which cycle is depend on production level and the number of commodities produce in a certain time limit by the available factors.
The rule of substitution effect is important while we count the total factor productivity because every seller or producer can easily compare the productivity ratio of two factors and the choice of the factor is totally depends on the high productive level.
Income effect for laser is also important for the total factor productivity because the high productivity means the high income and the high leisure.
Closed economic model means the economy where the outer trade for the trade outside the domestic territory is not possible and very limited so in this point of time and in this model the count of productivity of a particular factor plays an important role because on the productivity increases the level of production and self Reliance.