Chapter 6: Economic Growth, the Financial System, and business Cycles

Question 1

Long-Run Economic Growth

Answer 1

The process by which rising productivity increases the average standard of living

Question 2

Growth rate of real GDP in a particular year

Answer 2

equal to the percentage change from the previous year

Question 3

Average annual growth rate

Answer 3

Compute the annual growth rate that would result in the change that occur across that time frame
- for shorter periods of time averaging the growth rate for each year can approximate

Question 4

Rule of 70

Answer 4

Judges how fast an economic variable is growing by calculating the number of years it would take to double
= 70/ growth rate

Question 5

Labor Productivity

Answer 5

The quantity of goods and services that can be produced by one worker or by one hour of work
- Measured in output per hour of work

Question 6

What factors determine labor productivity

Answer 6

The quantity of capital per hour worked and the level of technology

Question 7

Capital

Answer 7

Manufactured goods that are used to produce other goods and services

Question 8

Capital stock

Answer 8

The total amount of physical capital available in a country

Question 9

Human Capital

Answer 9

The accumulated knowledge and skills workers acquire from education, training, or life experience

Question 10

Technology

Answer 10

The processes a firm uses to turn inputs into outputs of goods and services

Question 11

Technology change

Answer 11

An increase in the quantity of output firms can produce using a given quantity of inputs

Question 12

Entrepreneurs role in a market economy

Answer 12

• Make crucial decisions about whether to introduce new technology to produce better or lower-cost products
• whether to allocate the firm’s resources to research and development that can result in new technologies

Question 13

Potential GDP

Answer 13

The level of real GDP attained when all firms are producing at capacity
- Measured by production when operating on normal hours using a normal workforce

Question 14

Output gap

Answer 14

The percentage difference between actual GDP and potential GDP

Question 15

Retained Earnings

Answer 15

Profits that are reinvested in the firm rather than paid to the firm’s owners

Question 16

Financial System

Answer 16

The system of financial markets and financial intermediaries through which firms acquire funds from households

Question 17

Financial Markets

Answer 17

Markets where financial securities, such as stocks and bonds are bought and sold

Question 18

Financial Security

Answer 18

A document that states the terms under which funds pass from the buyer of the security to the seller

Question 19

Stocks

Answer 19

Financial securities that represent partial ownership of a firm

Question 20

Bonds

Answer 20

Financial securities that represent promise to repay a fixed amount in the future

Question 21

Financial Intermediaries

Answer 21

Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers

Question 22

Mutual Funds

Answer 22

Sell shares to savers and then use the funs to buy a portfolio of stocks, bonds, mortgages and other financial securities

Question 23

What are the 3 key services a financial system provides for savers and borrowers

Answer 23

• Risk sharing
• liquidity
• Information

Question 24

Risk

Answer 24

The chance that the value of a financial asset will change relative to what you expect

Question 25

Risk sharing

Answer 25

The ability of savers to spread their money among many financial assets

Question 26

Liquidity

Answer 26

The easy with which one asset can be converted into a different asset

Question 27

Information provided by financial system

Answer 27

The collection and communication of information or facts about borrowers and expectations about returns on financial securities

Question 28

Open economy

Answer 28

There is interaction with other economies in terms of trading goods and services as well as borrowing and lending

Question 29

Closed Economy

Answer 29

There is no trading, borrowing or lending with other economies

Question 30

Private Saving

Answer 30

Equal to what households retain from their income after purchasing goods and services and paying taxes

Question 31

What two ways do households receive income

Answer 31

By supplying the factors of production to firms and as transfers from government

Question 32

How can private saving be calculated

Answer 32

Y + TR - C - T

Question 33

Public Saving

Answer 33

Equals the amount of tax revenue the government retains after paying for government purchases and making transfer payments to households
Spublic= T-G-TR

Question 34

Balanced Budget

Answer 34

When the government spends the same amount as it collects

Question 35

Budget Deficit

Answer 35

When the government spends more than it collects in taxes

Question 36

Budget Surplus

Answer 36

When the government spends less than it collects in taxes

Question 37

Market for loanable funds

Answer 37

The interaction between borrowers and lenders determines the market interest rate and the quantity of loanable funds exchanged

Question 38

Demand and supply in the loanable funds Market

Answer 38

DEMAND
- The demand for loanable funds is determined by the willingness of firms to borrow money to engage in new investments
- The lower the interest rate, the more investment projects firms can profitably undertake and the greater the quantity of loanable funds they will demand
SUPPLY
- Determined by the willingness of households to save and by the extent of government savings
- greater interest rad = bigger reward saving and households will save more of their income

Question 39

Crowding out

Answer 39

A decline in private expenditures or private investment expenditures as a result of an increase in government purchases

Question 40

Expansion Phase

Answer 40

Production, employment and income are increasing
- ends with business cycle peak

Question 41

Recession Phase

Answer 41

Production, employment, and income decline
- ends with business cycle trough
- Defined as 2 consecutive quarters of negative real GDP growth

Question 42

Why does unemployment rate rise even after most economists believe that a recession has ended

Answer 42

• Labor force growth may hide changes in the employment
• not all firms expand at the same rate after a recession