Quiz Three Flashcards
Long run growth
The process by which rising productivity increases the average standard of living
What can LRG do?
Compare economic performance over time or performance of different economies at a particular time
Growth rate formula
(Current/base)^(1/yrs between) - 1
Rule of 70
Shows how fast it will take rGDP per capita to double
How to calculate rule of 70
70/ (growth rate)
What determines the growth rate?
Increases in labor productivity
Increased labor productivity caused by:
Higher quantity of capital per hour worked
Technological change (which is more important)
Property rights
Why is technological change so important for economic growth?
Better tech = increase in quality of output firms can produce with a given quantity of input
Potential GDP
GDP attained when all firms are producing at capacity. Increases over time with labor force and tech change
Why is a 2% inflation rate ideal?
Cushion from deflation
Gives the fed power during bad recessions
Helps prices convey information better
Why don’t we want inflation over 2%
More variable and less predictable inflation
Harm from anticipated inflation
Menu costs
Value of the dollar decreases
Harm from unanticipated inflation
Wages fall behind prices, things become more expensive
Can reduce real interest rates
Which form of inflation is more harmful?
Unanticipated, it’s much more expensive for consumers. Anticipated inflation isn’t nearly as costly in the long run
Ex: high rates during COVID
