Chapter 10 - Long-Run Economic Growth

Question 1

What are 3 valid criticisms of economic growth?

Answer 1

1. Growth is not sustainable (env, depletes ressources, etc)
2. Growth may not increason overall well-being
3. Social costs

Question 2

What are the sources of economic growth?

Answer 2

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

Question 3

The long-run aggregate supply curve is

Answer 3

vertical. It shifts to the right as technological change occurs. Other factors that shift the long-run aggregate supply are increases in capital stock or the number of workers.

Question 4

The aggregate production function can be expressed as

Answer 4

GDP = FT(L , K, H).
Labour (L) and physical capital (K) employed, the quality of labour’s human capital (H), the state of technology (T)

Question 5

The short-run aggregate supply curve is _____ sloped

Answer 5

positively

Question 6

During the past decade, a nation’s average annual rate of population growth was 4 percent, and its average annual real GDP growth rate was 1 percent. Thus, the average annual rate of growth in per capita real GDP was:

Answer 6

-3.0 percent. In order for a nation to experience growth in per capita real GDP, it has to achieve a growth rate that exceeds population growth.

In this case, the country’s growth would have to be greater than 4 percent before per capita real GDP will increase

Question 7

List the general costs of economic growth.

Answer 7

• Forgone consumption: sacrifice consumption today for the promise of more goods and services in the future.
• Social costs: some people’s skills become obsolete. (typewriters for example)

Question 8

How do we calculate private and public savings?

Answer 8

Private savings = Y* - T - C
Public savings = T-F

Question 9

How does an increase in investment demand affect saving and output?

Answer 9

An increase in the supply of national savings reduces the real interest rate and encourages more investment.
The higher rate of investment leads to a higher growth rate of potential output.

Alternate Answer: An increase in the demand for investment, pushes up the real interest rate and encourages more saving by households.

The higher rate of saving (and investment) leads to a higher growth rate of potential output

Question 10

What is the function GDP = FT(L, K, H) called?

Answer 10

Neoclassical Growth Model.

Question 11

What are the key assumptions of the Neoclassical model?

Answer 11

1) Diminishing marginal returns when any of the factors is increased on its own.
ie. If only labor (L) is increased forever, that will not increase GDP forever. Rate of increase will slow down at some point and may even go negative.
2) Constant return to scale when all factors are increased together.
ie. if we double (L,K,H) then GDP should double.
3) For simplicity, assume human capital and physical capital can be combined into a single variable, the capital.
4) Technology is always constant.