ECON Exam 2 PLA’S – Flashcards
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The two key factors that cause labor productivity to increase over time are..
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the quantity of capital per hour worked and the level of technology
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Potential real GDP is..
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the level of GDP attained when all firms are producing at capacity
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What is human capital?
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The knowledge and skills workers acquire from education and training or from their life experiences
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What leads to long-run economic growth? (3 things)
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1) Improved labor productivity 2) Technological change 3) Increase in the capital stock
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Whats one thing that wouldn't lead to long-run economic growth?
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Increase in average wages
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What is the best measure of the standard of living of the typical person in a country?
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Real GDP per person
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The financial system of a country is important for long-run economic growth because..
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Firms need the financial system to acquire funds from households
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What is the equation that shows the investment-saving equality?
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S= Y - C - G (S = Sprivate + S public) (Y = GDP) (C = consumption expenditure) (G= government expenditure)
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What causes crowding out to occur?
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Governments must borrow funds which causes interest rates to rise and thus private investment is reduced
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What is the supply of loanable funds determined by?
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Household saving
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What are some examples of "loanable funds"?
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Bank certificates of deposit, mutual fund shares, bonds.
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Households supply loanable funds because of the..
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Interest income received from the borrowers
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Businesses demand loanable funds because..
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Firms need to borrow funds for new projects, such as building new factories or carrying out new research projects
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When examining economic growth rates throughout history..
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The world experienced little to no growth until the industrial revolution, after which some economies began to experience real economic growth
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Why do economic growth rates matter? (3 reasons)
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1) When a country sustains high growth rates, life expectancy at birth increases 2) High levels of sustained economic growth reduces infant mortality 3) High growth rates coincide with improved living standards
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If theres an increase in capital per hour worked, holding technology constant, then..
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there is a MOVEMENT ALONG the per worker production function
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If there in an increase in technology, holding constant the quality of capital per hour worked, then..
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There is a SHIFT UPWARDS in the per worker production function
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Economic growth will slow down or stop if..
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More capital per hour is used because of dimishing returns to capital
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Some economies are able to maintain high growth rates despite dimishing returns to capital by using..
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Better or enhanced technology, along with accumulating capital. They are growing because technology, unlike capital, is subject to increasing returns.
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What does the new growth theory suggest?
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The accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable
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How does the federal government intervene in the market to increase the amount of knowledge capital? 3 things
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1) patents 2) subsidies 3) public education
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What is responsible for the upward shifts in the per-worker production function?
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Technological change
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Most of the poor countries experience slow growth because of..
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Frequent civil disturbances such as wars and revolutions The governments failure to enforce the rule of law Low rates of saving and investment
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What is the key idea in the aggregate expenditure macronomic model?
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In any particular year, the level of GDP is determined mainly by the level of aggregate expenditure
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Inventories refer to
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Goods that have been produced but haven't been sold yet
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Usually at the beginning of a recession, inventories ______
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Rise
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At the beginning of an expansion, inventories ____
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fall
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What does aggregate expenditure represent?
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The amount of spending that occurs in an economy
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Macroeconomic equilibrium occurs where
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Total spending (AE) equals total production (GDP)
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If the government raises the amount of taxes, holding everything else constant, than..
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Disposable income will decrease.
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What is the meaning of the 45 degree line in the diagram?
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All the points where aggregate expenditure equals real GDP
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The slope of the aggregate expenditure line equals..
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The slope of the consumption function
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When is the economy in a recession? (in regards to the 45 degree line)
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When the aggregate expenditure line intersects the 45 degree line at a level of GDP below potential GDP
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What does the aggregate demand curve show the relationship between?
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The price level and the quantity of real GDP demanded by households, firms, and the government.
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What does the aggregate supply curve show the relationship between?
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The price level and the quantity of real GDP supplied by firms.
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A movement down the aggregate demand curve could be the result of a..
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change in the price level
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A shift outward in the aggregate demand curve could be a result of a
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Change in the expectations of households
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If price level increases, then..
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There will be a movement up along a stationary aggregate demand curve
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A movement along the SRAS could be the result of a..
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Change in the price level
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A shift to the right in the SRAS could be the result of a change in..
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The labor force
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The position of the long-run aggregate supply curve is determined by..
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The number of workers, the amount of capital, and the available technology.
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In the long run, changes in what doesn't affect the level of real GDP?
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The price level.
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What will cause the long-run aggregate supply curve to shift to the right?
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An increase in the number of workers Technological change The accumulation of more machinery and equipment (capital)
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Why does the short-run aggregate supply curve slope upward?
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Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs
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Why does the failure of workers and firms to accurately predict the price level reslt in an upward-sloping aggregate supply curve?
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Because firms are often slow to adjust wages Because menu costs make some prices "sticky" Because contracts between workers and firms make some wages "sticky"
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Say aggregate demand increases and shifts to the right. How will the economy shift to adjust from the short-run equilibrium point to the new long run?
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Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left.
