Implications of Sustained Productivity Increases

Very Hard Economic Growth And Development Productivity

Consider a closed economy with a production function that exhibits constant returns to scale. The economy employs labor and capital to produce goods and services. Over the past decade, this economy has experienced a significant increase in productivity due to technological advancements and better education of the workforce.

In this context, which of the following statements correctly reflects the implications of a sustained increase in productivity on the long-term economic growth trajectory of this economy?

Sustained increases in productivity will lead to higher wages but not necessarily higher employment levels.

Higher productivity will result in a permanent increase in the economy's potential output, shifting the Long-Run Aggregate Supply (LRAS) curve to the right.

Increases in productivity will always lead to a decrease in overall output in the short run due to the reallocation of resources.

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