macro ch26 & 27

Question 1

what are the 2 facts about living standards and growth rates
around the world?

Answer 1

FACT 1: There are vast differences in living standards around the world.

FACT 2: There is also great variation in growth rates across countries.

Question 2

How do we measure poverty?

Answer 2

By income in $$$: different people and different countries have different standards. Consensus
seems to have formed around living on <$10 per day.

By relative income: Consensus is having an income <75% of your country’s median
income.

By “capabilities”:
-alimentary poverty: can’t
afford food

-Capability poverty: can’t
afford food + health care + education

-Patrimony poverty: can’t afford food + health care + education + clothes + housing + transportation

Question 3

what is productivity

Answer 3

the average quantity of
goods + services produced per unit of labor input

Y/L (output per worker)

Question 4

what is Physical Capital Per Worker

Answer 4

(K): physical assets (like equipment and structures) used to
produce goods + services is called

Question 5

what is Human Capital Per Worker

Answer 5

(H): the knowledge and skills workers acquire
through education, training, and experience.

Question 6

what is Natural Resources Per Worker

Answer 6

(N): the factors of production that nature provides, e.g., land, oil, mineral deposits, good soil.

Question 7

what is Technological Knowledge

Answer 7

(A): society’s understanding of the best ways to produce goods + services.

any advance in knowledge that boosts productivity (e.g., Henry Ford & the assembly line)

Question 8

How is technological knowledge
different from human capital?

Answer 8

• A is general knowledge about how to do things.
• H is personal to the person who acquires it.
• H goes home at the end of the day. A sticks around and can
  be used by anyone at the firm.

Question 9

what is the equation for the production function and what should it do?

Answer 9

Y= A f(L, K, H, N)

it should predict how much stuff we can make.

all the inputs are positively correlated → if L↑, Y ↑

if any input = 0, then Y = 0.

Question 10

what is constant returns to scale

Answer 10

Changing all inputs by the same percentage causes output to
change by that percentage.

Question 11

what is the diminishing
marginal returns to capital?

Answer 11

If workers have little K, giving them more increases their productivity a lot.

If workers already have a lot of K, giving them more increases productivity by only a little.

faster growth, but temporary

Question 12

what is The catch-up effect

Answer 12

the property whereby poor countries tend to grow more rapidly than rich ones

(think of convergence: this process of poor countries getting richer and healthier and catching up to rich countries)

Question 13

How can public policy affect
long-run growth in productivity
and living standards?

Answer 13

1. government can increase productivity by promoting education
2. money spent on health care is another type of investment in
   human capital = healthier workers are more productive.

investing in H also involves a tradeoff between the present &
future

Question 14

what are the 3 possible fundamental causes of economic growth

Answer 14

culture: some value hard work, thrift, savings & countries are
rich because their people share
common experiences and
religion.

geography: climate, natural resources – countries are rich because they are abundant in natural resources, and the landscape makes it easy to move
goods.

institutions ( 2 types):
political: structure of government, rule of law, certainty + stability

economic: quality of markets, protection of property
rights, certainty + stability

Question 15

what are property rights and how does political instability effect it?

Answer 15

the ability of people to exercise authority over the resources they own

political instability (e.g., frequent coups) creates uncertainty over
whether property rights will be protected in the future.

Question 16

what are the requirements to achieve economic stability, efficiency, and healthy growth?

Answer 16

law enforcement; effective courts; functioning markets and a readily accepted currency; a stable constitution; and [relatively] honest government officials.

Question 17

what are the pros and cons of population growth

Answer 17

pros:
more people
= more scientists, inventors, engineers
= more frequent discoveries
= faster technological progress & economic growth

cons: having TOO many people may affect living standards in
several different ways:
* stretches natural resources

Question 18

Was Malthus right in terms of his population growth theory?

Answer 18

he was right, based on what he had observed up to the time he
was writing.

BUT he was wrong because he failed to account for technological
progress and productivity growth – he failed to observe the
Industrial Revolution!

Question 19

what is the financial market designed to do

Answer 19

it is designed to match the saving of one person with the cash needs of another.

Question 20

what is the difference between people who have cash and people who need cash

Answer 20

people who have cash = savers.
(bond buyer)
people who need cash = borrowers (bond seller)

Question 21

in terms of direct funding what are the responsibilities of the saver?

Answer 21

finding the borrower;

assessing the borrower and the potential investment; and

monitoring the activities of the borrower and insuring the
borrower using the $$$ responsibly and for the reason intended

Question 22

what is a financial intermediary?

Answer 22

someone who gets in the middle,
between the saver and the borrower; taking the role and responsibilities of the saver for a small fee

helps savers to indirectly provide
funds to borrowers. Examples:
-banks
-mutual funds

Question 23

what happens during a financial crisis and how often do they occur?

Answer 23

1.large decline in some asset prices

2. insolvencies at financial institutions
3. decline in confidence in financial institutions
4. credit crunch → borrowers unable to get loans because troubled
   lenders are not confident in borrowers’ credit-worthiness.
5. economic downturn → financial institutions fail and a fall in
   investment caused GDP to fall and unemployment to rise.
6. vicious circle → the downturn reduces profits and asset values,
   which worsens the crisis.

they occur periodically, we know they will happen but now precisely when, but they almost always follow a predictable pattern

Question 24

what is private savings

Answer 24

it is saving by households =Y-T-C

Question 25

what is public saving

Answer 25

it is saving by the government

=T-G

Question 26

what is national saving

Answer 26

it is saving overall

=(Y-T-C) + (T-G) or Y-C-G

Question 27

what is our gdp equation for an enclosed economy

Answer 27

Y= C+I+G

we exclude exports and imports

Question 28

what
is saving in an enclosed economy?

Answer 28

=investment

Question 29

what are the differences between a budget surplus and budget deficit

Answer 29

sometimes taxes > expenses (budget surplus).
-doesn’t happen very often in the US
=T-G

sometimes taxes < expenses (budget deficit).
-much more common
=G-T

Question 30

how does interest rate impact The Slope of the Supply Curve

Answer 30

An increase in the interest rate makes saving more attractive,
which increases the quantity of loanable funds supplied.

Question 31

how does interest rates impact The Slope of the Demand Curve

Answer 31

A fall in the interest rate
reduces the cost of borrowing,
which increases the quantity of
loanable funds demanded.

Question 32

how does the equilibrium work and how can it change

Answer 32

The interest rate adjusts
to make supply and
demand equal (creating the equilibrium)

-market forces : supply and demand for funds

-government policies : most of the time, these are designed to encourage people
to save more.

Question 33

what is crowding out

Answer 33

when the US government goes to the front of the borrowing line.

-there are less funds available for everyone else - for investment and otherthings.