week 10

Question 1

what the production function?

Answer 1

y = f ( K,L)

▶ Y is aggregate output
▶ K is capital like machines and factories
▶ L is labour
▶ f is the production function that converts capital and labour into output

the production function has positive but diminishing marginal returns of capital and labour

Question 2

what does the production focus show in a graph?

Answer 2

demonstrates higher capital will increase the level of output but wont generate permanent growth

better technology will lead to permeant growth

Question 3

what is capital accumulation?

Answer 3

the process of increasing the amount of capital assets available for production, often through investments, saving, and the generation of profits

Question 4

what are the assumptions of capital accumulation?

Answer 4

▶ Labour L is constant i.e. no population growth
▶ Everyone is working i.e. no unemployment
▶ No technological progress

Question 5

what can investment lead to in terms of capital accumulation?

Answer 5

investment can lead to change in capital which will result in higher capital which will increase output which can then be used for more invested

this is capital accumulation

Question 6

how does depreciation effect investment?

Answer 6

▶ Capital increases if investment is larger than depreciation
▶ Capital decreases if investment is smaller than depreciation

Question 7

what does a higher saving rate mean?

Answer 7

it means an up shift in the investment curve

more investment means more capital and higher output

As the production function has
diminishing marginal returns more and more capital is required to increase output

Question 8

what is the trade off for households for saving?

Answer 8

▶ More saving reduces consumption in the short-run
▶ But more saving increases the capital stock and increases output