Chapter 6: The Goals of Macroeconomic Policy and Chapter 7: Economic Growth Theory and Practice Flashcards
Inputs
labor, machinery, buildings, and other resources used to produce outputs
Outputs
goods and services that the economy produces
Aggregate Supply
given the available supplies of inputs like labor and capital, and the technology at its disposal, an encamp is able to produce a certain volume of outputs, measured by GDP
Aggregate demand
how much of the capacity to produce is actually utilized depends on how many of these goods and services people and businesses want to buy
T/F policy should create an environment in which the economy can expand its productive capacity rapidly
True
Growth policy
refers to government policies intended to make the economy grow faster in the long run
- policy makers should manage aggregate demand so that it grows in line with the economy’s capacity to produce
Low aggregate demand leads to ______ unemployment while high aggregate demand leads to ______ inflation
high; high
We want ____ unemployment and ____ inflation
low; low
During the twentieth century, living standards in the US increased by a factor of almost _____
7
Labor productivity
amount of output a worker turns out in an hour of labor; if output is measured by GDP, it is GDP per hour of work
T/F Only rising productivity can raise standards of living in the long run
True
Potential GDP
real GDP that the economy would produce if its labor and other resources were fully employed
Labor force
number of people holding or seeking jobs
Production function
shows the volume of output that can be produced from given inputs, given the available technology
Either more capital or better technology. will shift the production function ______ and therefore raise potential GDP
UPWARD (left?)
Growth rate of potential GDP must depend on:
- the growth rate of the labor force
- the growth rate of the nation’s capital stock
- the rate of technical progress
Real GDP is the product of the total hours of work in the economy times the amount of output produced per hour…. what we just called_______
Labor productivity
GDP=
Hours of work * output per hour = hours of work * labor productivity
Growth rate of potential GDP is the ____ of the growth rates of labor input (hours of work) and labor productivity
Sum
Growth rate of potential GDP=
Growth rate of labor input + growth rate of labor productivity
Over long periods of time, the growth rates of actual and potential GDP are normally ________ however, these two often diverge sharply over_____ periods owing to cyclical fluctuations
quite similar; short
The economy will become inflationary when people’s demands for goods and services _________ than its capacity to produce them
expand faster
When the economy grows more _____ than its potential, it fails to generate enough new jobs for its ever-growing labor force; hence, the _______ ______ rises
slowly; unemployment
When the economy grows ______ than its potential, the _________ _____ falls
faster; unemployment
In good times and bad, married men suffer the _____ unemployment and teenagers suffer the _____ ; nonwhites are ________ much more often than whites; blue-collar workers have above-average rates of unemployment while well educated people have ______ average unemployment rates
least; most; unemployed; below
Employed
includes everyone currently at work, including part-time workers
Unemployed
For persons not currently working, determine if:
1.) temporarily laid off from a job to which they expect to return
2.) actively sought work during the previous four weeks
(so pretty much you count as unemployed if your job is in limbo)
Out of the labor force
failed to look for a job (not everyone wants to work so this helps divide the unemployed from the unwilling)
Discouraged worker
an unemployed person who gives up looking for work and is therefore no longer counted as part of the labor force
Frictional unemployment
unemployment due to normal turnover in the labor market; it includes people who are temporarily between jobs because they are moving or changing occupations, or are unemployed for similar reasons
T/F Frictional unemployment is short-term
True
Structural unemployment
refers to workers who have lost their jobs because they have been displaced by automation, because their skills are no longer in demand, or because of similar reasons
Cyclical unemployment
portion of unemployment that is attributable to a decline in the economy’s total production; rises during recessions and falls as prosperity is restored
(due to cycles of the economy)
When macroeconomists speak of maintaining “fully employment,” they mean limiting unemployment to its ________ and _________ components
frictional; structural
John F. Kennedy was the first president to commit the federal government to a specific numerical goal for unemployment; what did he pick?
4 percent target
Full employment
a situation in which everyone who is willing and able to work can find a job; at full employment, the measured unemployment rate is still positive
Unemployment rate goal now
around 5%
Unemployment insurance
government program that replaces some of the wages lost by eligible workers who lose their jobs
Unemployment insurance does not apply to which groups?
- people just joining the labor force
- those re-entering after prolonged absences
- people who just quit their jobs (unless special circumstance)
How does unemployment insurance affect AD?
By giving money to those who become unemployed, the system helps prop up aggregate demand during recessions
T/F Our system of payroll taxes and unemployment benefits spreads the costs of unemployment over the entire population, but it does not eliminate the basic economic cost
True
Purchasing power
(of a given sum of money) is the volume of goods and services that it will buy
During inflationary times, people pay ____ prices for the same quantities of goods and services they had before; therefore, more and more income is needed just to maintain the same standard of living
Higher
- purchasing power is the decline in what money will buy
During a period of inflation, real wages _____
rise
Real wage rate
wage rate adjusted for inflation; specifically it is the nominal wage divided by the price index
- the real wage thus indicates the volume of goods and services that the nominal wages will buy
T/F In the long run, wages tend to outstrip prices as new capital equipment and innovation increase output per worker
True
Wages rise____ than prices usually
faster
Real wage=
(nominal wage / price level) *100
Relative price
Price in terms of some other item rather than in terms of dollars
Inflation is not usually to blame when some goods become more expensive ______ to others
relative
Those who lend money are often victimized by inflation
true when actual inflation is less than expected nominal rate
Borrowers often gain from inflation
true when actual inflation is less than expected nominal rate
Real rate of interest
percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing; it indicates the increased ability to purchase goods and services that the lender earns
Nominal rate of interest
the percentage by which the money the borrower pays back exceeds the money that was borrowed, making no adjustment for any decline in the purchasing power of this money that results from inflation
If the expected rate of inflation that is embodied in the nominal interest rate ______ the actual rate of inflation, no one gains and no one loses
matches
Capital gain
difference between the price at which an asset is sold and the price at which it was bought
T/F Real interest rate matters economically while nominal interest rates only matter politically
True
Growth policy
ensuring that the economy sustains a high long-run growth rate of potential GDP
Stabilization policy
keeping actual GDP reasonably close to potential GDP in the short run, so that society is plagued by neither high unemployment nor high inflation
Growth rate of potential GDP
sum of the growth rates of hours of work and labor productivity
Three pillars of productivity growth
1.) Capital
2.) Technology
3.) Labor quality (education and training)
For a given technology and a given labor force, labor productivity will be higher when the capital stock is _____
Larger
Labor productivity will be higher when the technology is _____
better
Better educated people can produce ___ goods and services in an hour than less-educated people can
more
Human capital
amount of skill embodied in the workforce; it is most commonly measured by the amount of education and training
The level of productivity in a nation depends on its supplies of human and physical capital and the state of its technology; BUT the growth rate of productivity depends on the ______ __ _________ of these three factors
rates of increase
Investment
flow of resources into the production of new capital; it is the labor, steel, and other inputs devoted to the construction of factories, warehouses, railroads, and other pieces of capital during some period of time
Businesses ____ to the existing supply of capital whenever they make investment expenditures
add
Lower real interest rates ______ investment
increases
Why does lower interest rates increase investment?
The amount that businesses invest depends on the real interest rate they pay to borrow funds; the lower the real rate of interest, the more investment there will be
Barack Obama proposed that lower taxes would lead to ______ investment spending
greater
Technical change (for the better) _____ investment spending
increases
High levels of sales and expectations of rapid economic growth create an atmosphere conducive to investment… why?
The growth of demand can induce businesses to invest more
T/F STEM contributes to the advancement of technology
True
High rates of investment contribute to ____ technical progress
rapid
