10.3: Macroeconomic Equilibrium and Growth

Question 1

· Production function - provides the quantitative link between the levels of … that the economy can produce and the … used in the production process.

Answer 1

Production function - provides the quantitative link between the levels of output that the economy can produce and the inputs used in the production process.

Question 2

A two-factor production function with labor and capital as the inputs is expressed mathematically as:

Answer 2

Y = AF(L,K)

Where:
· Y denotes the level of aggregate output in the economy
· L is the quantity of labor or number of workers in the economy
· K is the capital stock or the equipment and structures used to produce goods and services
· A represents total factor productivity (TFP).

Question 3

· Capital deepening investment increases the … of capital relative to …

Answer 3

· Capital deepening investment - increases the stock of capital relative to labor.

Question 4

Convergence - the tendency for … in output per capita across countries to … over time.

Answer 4

Convergence - the tendency for differences in output per capita across countries to diminish over time.

Question 5

Robert Solow model expressed mathematically as:

Answer 5

Growth in potential GDP = Growth in TFP + WL (Growth in labor) + WC (Growth in capital)

Question 6

Formula for labor productivity is:

Answer 6

Labor productivity = Real GDP/Aggregate hours