CH10 - Long-Run Economic Growth

Question 1

What is economic growth?

Answer 1

Sustained, long-run increases in the level of real GDP and real per capita GDP

Question 2

When do increase in material living standards occur?

Answer 2

When real PER CAPITA output increases

Question 3

An important cost of economic growth is the sacrifice of current _________ in exchange for investment that raises future ___________

Answer 3

consumption
consumption

Question 4

What are the 4 major determinants of economic growth?

Answer 4

1. Growth in the labor force
2. Growth in human capital
3. Growth in physical capital
4. Technological improvements

Question 5

What determinant is this:
A policy to subsidize R&D activities

Answer 5

Technological improvement

Question 6

What determinant is this:
A reduction in unemployment insurance benefits

Answer 6

Increases in the labour force.

Question 7

What determinant is this:
A policy to subsidize general education

Answer 7

Growth in the human capital

Question 8

What determinant is this:
The provision of investment tax credits

Answer 8

Growth in physical capital

Question 9

In the long​ run, changes in average material living standards are best shown by what?

Answer 9

Growth in real per capita GDP

Question 10

What are 2 main benefits from economic growth?

Answer 10

Rising average living standards
Addressing poverty and income inequality

Question 11

What is the change in the whole society’s consumption pattern?

Answer 11

People shift away from tangible goods toward services

because economic growth raises average income

Question 12

Why is economic growth a benefit to address poverty and income inequality?

Answer 12

It’s much easier for a rapidly growing economy to be generous toward its less fortunate citizens than it is for a static economy

It’s easier to reduce income inequalities while still allowing all incomes to rise

Question 13

What are the 2 major costs of economic growth?

Answer 13

1. Forgone consumption
2. Social costs

Question 14

What is forgone consumption?

Answer 14

Sacrifice of current consumption, to have more goods and services in the future, thus more consumption

Question 15

What are the social costs of economic growth?

Answer 15

The process of economic growth is disruptive for some businesses and workers.

Existing firms, products, and skills are made obsolete by new firms, products, and skills

Question 16

What is the growth in the labor force

Answer 16

Growth in population or increases in the fraction of the population that chooses to participate in the labor force cause it to grow

Question 17

What is the growth in human capital

Answer 17

Set of skills workers acquire through formal education and on-the-job training.
Human capital can be thought of as the quality of the labor force

Question 18

What is the growth in physical capital

Answer 18

The stock of physical capital grows only through the process of investment.
We include here improvements in the quality of physical capital

Question 19

What are technological improvements

Answer 19

Innovations that introduces new products, new ways of producing existing products, and new forms of organizing economic activity

Question 20

What are the 3 types of savings?

Answer 20

Public Savings
Private Savings
National Savings

Question 21

What is the public savings equation?

Answer 21

Public savings = Tax revenue - gov. expenditure

Question 22

What is the private savings equation?

Answer 22

Disposable income - Tax - Consumption

Y - T - C

Question 23

What is the national savings equation?

Answer 23

Private + Public Savings

or

Y* less C less G

Question 24

When is the equilibrium interest rate determined in the long-run version of the macro model?

Answer 24

Where desired national savings = desired investment

Question 25

What happens to the price of credit if
NS > I

Answer 25

Excess supply pushes it down

Question 26

What happens to the price of credit if
NS <I

Answer 26

Excess demand pushes it up

Question 27

In the long run, (Y = Y*)

Equilibrium in the market for loanable funds determines the interest rate as well as the amount of ___________ (2)

Answer 27

desired saving
and
desired investment in the economy

Question 28

What will change following a shift in either the supply of national saving or the demand for​ investment (2)

Answer 28

Equilibrium real interest rate
And
The rate of growth of potential output in the economy

Question 29

An increase in the amount of the​ economy’s resources devoted to _________ leads to an increase in the growth rate of _________ output

Answer 29

investment

potential

Question 30

Why is the investment curve downward sloping?

Answer 30

Because a rise in the real interest rate increases the opportunity cost of investment

or

A fall in the real interest rate decreases the opportunity cost of investment

Question 31

An increase in the NS function will shift it how?

Answer 31

To the right

Question 32

If a fiscal contraction happens by increasing taxes, what happens to the NS and I graph?

To the equilibrium interest rate?

To the amount of investment?

To the long-run growth?

Answer 32

The NS function shifts right

Equilibrium interest rate decreases

Investment Increases

Long-run growth increases

Question 33

How can government encourage national savings? (2)

Answer 33

By creating incentives to save (or disincentives to consume) and limiting government deficits

Question 34

How might government encourage investment?

Answer 34

Increase or create tax deductions and tax credits for investment expenditure

Question 35

In Neoclassical growth​ theory, when any one of the factors increases on its own while the others are​ fixed, the aggregate production function exhibits ______

Answer 35

Diminishing marginal returns

Question 36

When there is diminishing marginal returns, each additional​ worker, compared to the previous​ worker, adds _______ to total output

Answer 36

Less

Question 37

What is balanced growth?

Answer 37

When capital and labor grow at the same rate, GDP will increase

Question 38

​”Balanced growth” refers to a situation where the labour growth rate is​ _______ the rate of growth of capital​ (both human and physical​ capital). Since increases in living standards are determined largely by increases in​ ________, it is clear that balanced growth​ ______ to explain rising material living standards.

Answer 38

equal to

per capita real output

unable

Question 39

Based on the Neoclassical growth​ model, what is something that could explain improvements in material living​ standards

Answer 39

An increase in the production of machinery

Question 40

What is the “Solow Residual”?

Answer 40

The amount of growth in GDP that cannot be accounted for by growth in the labour force or by growth in the capital stock.

Therefore, it’s a measure of the impact of ∆ in tech

Question 41

What is an embodied technical change?

Answer 41

When a new and better harvesting machine replaces an old harvesting machine on a​ farm, and is more productive than the old​ one.

Question 42

In Neoclassical growth​ theory, an increase in the labour force alone _________ total output and
________ _________ the level of per capita output

Answer 42

increases

eventually decrease

Question 43

In the newer growth theories, we assume that technological change is _______ to the economic system

Answer 43

endogenous

Question 44

Modern growth theories are more optimistic because they emphasize the unlimited potential of what?

Answer 44

Knowledge

Question 45

Why is the diffusion of technological knowledge is described as a costly process?

Answer 45

Because the use of new technology often requires knowledge that is learned only through experience

Question 46

Why is the resource exhaustion problem believed to be solvable?

Answer 46

Because advances in technological knowledge go hand in hand with an increase in resource efficiency