Chapter 10 Flashcards
4 major determinants of growth in real output
- increases in the LABOUR FORCE
- increases in the stock of PHYSICAL CAPITAL
- increases in HUMAN CAPITAL
- improvements in TECHNOLOGY
an important cost of economic growth is the sacrifice of current…
current consumption
in exchange for investment that raises future output and consumption
in the long run, changes in average material living standards are best shown by…
growth in productivity
all components of desired investment are related to the interest rate in what way?
are all NEGATIVELY related to the real interest rate
components of desired investment
- plant
- equipment
- inventories
- residential investment
in the long run, with output equal to potential, equilibrium in the market for loanable funds determines the interest rate as well as the amount of what 2 things?
- desired SAVING in the economy
- desired INVESTMENT in the economy
where does equilibrium occur in the market for loanable funds?
occurs at the real interest rat where national savings (NS) = investment (I)
at this interest rate, the amount of desired savings equals the amount of desired investment
a shift in either the NS curve or the I curve will lead to a change in…
- equilibrium real interest rate
- change in economy’s amount of resources devoted to investment
an increase in the equilibrium amount of investment implies a greater growth rate of the capital stock and thus a higher future growth rate of potential output
in the long run, factor prices are [ENDOGENOUS/EXOGENOUS] and are assumed to be [FULLY/PARTIALLY ADJUSTED] to the output gap
endogenous
fully
in the long run, changes in factor prices are EXPLAINED WITHIN THE MODEL and assumed to be COMPLETELY RESPONSIVE to any output gap (recessionary or inflationary)
after factor prices have adjusted, real GDP will return to the level of potential output
as GDP increases, it becomes ______ difficult to grow as rapidly as it was when…
becomes MORE DIFFICULT
to grow as rapidly as it was when PER CAPITA INCOME WAS LOWER
because of DIMINISHING MARGINAL RETURNS - as economy grows and GDP increases, the marginal returns on additional investment tend to decrease
ie. when an economy already has high levels of GDP (and significant physical and human capital), further increases don’t lead to as large of a proportional increase in output
diminishing marginal returns: the more developed an economy becomes, the harder it is to sustain…
growth rates
because it requires MORE INNOVATION and EFFORT to achieve the same growth as before
economic growth initially leads to increases in…
living standards
(increases leisure time, and pollution too)
what does the supply curve for national savings show?
NS curve shows the supply of financial capital that comes from households and governments
what does the investment demand curve show?
shows the demand for financial capital derived from investments in plant, equipment and residential construction
economic growth
the sustained, long-run increases in the level of real GDP
what rule can be used to understand cumulative effects of annual growth rates?
rule of 72
rule of 72
for any variable that grows at an annual rate of X percent
that variable will double in approximately 72/X years
