Quiz #5 Review Flashcards
when did growth thing start?
INdustrial Revolution, 1750 in England
why was the INdustrial revolution in England?
- people there had property rights over what they produced
- had the ability to produce more and incentive to keep producing
What is an institution?
an institutions are rules and arrangements, formal and informal, that direct our behavior
what 4 things affect growth and labor productivity?
- technology and change: having better tools and equipment
- human capital: knowledge and education
- capital: tools and equipment, more tools and equipment
- : technological change: having better equipment
diminishing marginal productivity?
adding more of 1 input to a fixed amount of another input will increase your output but my smaller and smaller increments
Dismal Science
Thomas Malthus predicted we would starve to death because the earth is a fixed input and labor keeps growing
-didnt account for technology change
Standard Growth Theory
- Robert Solow said capital was the key to growth
- add more capital, you produce more
New Growth Theory
Technological change, rather than capital, is key to growth
- Paul Romer
- add more capital and you produce more…but adding better capital allows you to produce even more than more
4 barriers to growth
- corruption (property rights being violated)
- political instability
- poor public education and health
- low rates of savings and investment
Aggregate Expenditure
what we buy
GDP:
what we produce
what happens when we buy a little less than everything we produced?
- inventories increase
- next year we dont produce as much
- GDP and employment decrease
If AE = GDP, inventories are…
unchanged and the economy is in macroeconomic equilibrium
If AE < GDP, inventories….
rise and GDP and employment will decrease the following year
If AE > GDP, inventories…
inventories will fall and GDP and employment will increase following year
what 5 laws of CONSUMPTION drive AE?
- curent disposable income
- household wealth
- expected future incomes
- price level
- interest rate
Marginal Propensity to Consume
how much of each additional dollar of income you spend on consumption
The Multiplier
(1) / (1-MPC)
4 laws of PLANNED INVESTMENT that drive AE
- expectations of future probability
- interest rate
- taxes
- cash flow
3 laws of NET EXPORTS that drive AE
- price level in the US compared to other countries
- growth rates of US compared to other countries
- exchange rate
as disposable income rises, consumption…
rises
as wealth increase, consumption…
rises
as expected income rises, consumptions…
consumption increases
as price level rises, consumption…
consumption decreases
as interest rate rises, consumption….
decreases
as expectation of future probability rises, chance in investment…
rises
as interest rate rises, chance of investment…
decreases
as taxes go up, chance of investment…
decreases
as cash flow increases, chance of investment…
decreases
as price level in US compared to other countries increase, exports…
exports go down
as growth rate of US increases, net exports…
decreases
as exchange rate of dollar increases, net exports…
decreases
