Chapter 25

Question 1

Economic growth

Answer 1

a sustained expansion of production possibilities.

Question 2

The economic growth rate

Answer 2

the percentage change of real GDP.

Question 3

Growth rate of real GDP equation

Answer 3

(current-previous)/(previous) X 100

Question 4

The standard of living is

Answer 4

less dependent on GDP as a whole and more dependent upon GDP per person.

Question 5

Real GDP per person (per capita)

Answer 5

the real GDP divided by the population.

Question 6

The Rule of 70 highlights

Answer 6

the importance of sustained economic growth and provides a formula for determining the number of years it takes for the level of any variable to double.

Question 7

The Rule of 70 Equation

Answer 7

(70)/(growth rate) = years to double

Question 8

To understand what determines the growth rate of real GDP, we must understand

Answer 8

what determines the growth rates of the factors of production and rate of increase in their productivity.

Question 9

Real GDP growth contributes to

Answer 9

improving our standard of living.

Question 10

Our standard of living improves only if we

Answer 10

produce more goods and services with each hour of labor.

Question 11

Our main concern is to understand what makes

Answer 11

labor more productive.

Question 12

Labor productivity is

Answer 12

the quantity of real GDP produced by one hour of labor.

Question 13

Labor Productivity Equation

Answer 13

(Real GDP)/(Agregate Hours)

Question 14

When labor productivity grows, real GDP per person

Answer 14

grows.

Question 15

The growth in labor productivity is the basis of the

Answer 15

rising standard of living.

Question 16

Two broad influences on Labor Productivity

Answer 16

Saving and investment in physical capital; Expansion of human capital and discovery of new technologies

Question 17

If we added an infinite amount of capital, we would ____ due to the notion that Capital is subject to the law of diminishing marginal returns.

Answer 17

not see infinite growth in our productivity.

Question 18

Capital is subject to

Answer 18

the law of diminishing marginal returns

Question 19

law of diminishing marginal returns which states that

Answer 19

if the quantity of an input is small, an increase in that input generates a large increase in its output. Conversely if the quantity of an input is large, an increase in that input generates a small increase in its output.

Question 20

If capital per hour of labor keeps increasing, labor productivity

Answer 20

increases by ever smaller amounts and eventually stops rising.

Question 21

Human Capital

Answer 21

the accumulated skill and knowledge of people

Question 22

Expansion of Human Capital comes from what three sources?

Answer 22

Education and Training; Job Experience; Health and diet

Question 23

Growth theory starts with

Answer 23

wanting a higher standard of living

Question 24

Economic Freedom

Answer 24

a condition in which people are able to make personal choices, their property is protected by the rule of law, and they are free to buy and sell in markets

Question 25

Property Rights

Answer 25

the social arrangements that govern the protection of private property.

Question 26

Free markets

Answer 26

allow buyers and sellers to receive signals about prices that create incentives to decrease or increase quantity supplied and demanded

Question 27

Policies to Achieve Faster Growth

Answer 27

Create incentive mechanisms; Encourage saving; Encourage research and development; Encourage international trade; Improve the quality of education

Question 28

Cobb Douglas Production Function

Answer 28

a functional form of the production function that represents the effectiveness of inputs, labor, capital, and total factor productivity, on total output (total production)

Question 29

Cobb Douglas Production Function Equation

Answer 29

Y=AL^B x K^A
Y = Total production ( the real value of goods and services produced in a year)
L = Labor input ( the total number of hours worked in a year)
K = capital input (the real value of all machinery, equipment, and buildings)
A = total factor productivity

Question 30

α and β are the _

α + β= _

Answer 30

output elasticities of capital and labor, respectively.

A+B=1