The two key factors that cause labor productivity to increase over time are..
the quantity of capital per hour worked and the level of technology
Potential real GDP is..
the level of GDP attained when all firms are producing at capacity
What is human capital?
The knowledge and skills workers acquire from education and training or from their life experiences
What leads to long-run economic growth? (3 things)
1) Improved labor productivity
2) Technological change
3) Increase in the capital stock
Whats one thing that wouldn't lead to long-run economic growth?
Increase in average wages
What is the best measure of the standard of living of the typical person in a country?
Real GDP per person
The financial system of a country is important for long-run economic growth because..
Firms need the financial system to acquire funds from households
What is the equation that shows the investment-saving equality?
S= Y - C - G
(S = Sprivate + S public)
(Y = GDP)
(C = consumption expenditure)
(G= government expenditure)
What causes crowding out to occur?
Governments must borrow funds which causes interest rates to rise and thus private investment is reduced
What is the supply of loanable funds determined by?
Household saving
What are some examples of "loanable funds"?
Bank certificates of deposit, mutual fund shares, bonds.
Households supply loanable funds because of the..
Interest income received from the borrowers
Businesses demand loanable funds because..
Firms need to borrow funds for new projects, such as building new factories or carrying out new research projects
When examining economic growth rates throughout history..
The world experienced little to no growth until the industrial revolution, after which some economies began to experience real economic growth
Why do economic growth rates matter? (3 reasons)
1) When a country sustains high growth rates, life expectancy at birth increases
2) High levels of sustained economic growth reduces infant mortality
3) High growth rates coincide with improved living standards
If theres an increase in capital per hour worked, holding technology constant, then..
there is a MOVEMENT ALONG the per worker production function
If there in an increase in technology, holding constant the quality of capital per hour worked, then..
There is a SHIFT UPWARDS in the per worker production function
Economic growth will slow down or stop if..
More capital per hour is used because of dimishing returns to capital
Some economies are able to maintain high growth rates despite dimishing returns to capital by using..
Better or enhanced technology, along with accumulating capital. They are growing because technology, unlike capital, is subject to increasing returns.
What does the new growth theory suggest?
The accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable
How does the federal government intervene in the market to increase the amount of knowledge capital? 3 things
1) patents
2) subsidies
3) public education
What is responsible for the upward shifts in the per-worker production function?
Technological change
Most of the poor countries experience slow growth because of..
Frequent civil disturbances such as wars and revolutions
The governments failure to enforce the rule of law
Low rates of saving and investment
What is the key idea in the aggregate expenditure macronomic model?
In any particular year, the level of GDP is determined mainly by the level of aggregate expenditure
Inventories refer to
Goods that have been produced but haven't been sold yet
Usually at the beginning of a recession, inventories ______
Rise
At the beginning of an expansion, inventories ____
fall
What does aggregate expenditure represent?
The amount of spending that occurs in an economy
Macroeconomic equilibrium occurs where
Total spending (AE) equals total production (GDP)
If the government raises the amount of taxes, holding everything else constant, than..
Disposable income will decrease.
What is the meaning of the 45 degree line in the diagram?
All the points where aggregate expenditure equals real GDP
The slope of the aggregate expenditure line equals..
The slope of the consumption function
When is the economy in a recession? (in regards to the 45 degree line)
When the aggregate expenditure line intersects the 45 degree line at a level of GDP below potential GDP
What does the aggregate demand curve show the relationship between?
The price level and the quantity of real GDP demanded by households, firms, and the government.
What does the aggregate supply curve show the relationship between?
The price level and the quantity of real GDP supplied by firms.
A movement down the aggregate demand curve could be the result of a..
change in the price level
A shift outward in the aggregate demand curve could be a result of a
Change in the expectations of households
If price level increases, then..
There will be a movement up along a stationary aggregate demand curve
A movement along the SRAS could be the result of a..
Change in the price level
A shift to the right in the SRAS could be the result of a change in..
The labor force
The position of the long-run aggregate supply curve is determined by..
The number of workers, the amount of capital, and the available technology.
In the long run, changes in what doesn't affect the level of real GDP?
The price level.
What will cause the long-run aggregate supply curve to shift to the right?
An increase in the number of workers
Technological change
The accumulation of more machinery and equipment (capital)
Why does the short-run aggregate supply curve slope upward?
Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs
Why does the failure of workers and firms to accurately predict the price level reslt in an upward-sloping aggregate supply curve?
Because firms are often slow to adjust wages
Because menu costs make some prices "sticky"
Because contracts between workers and firms make some wages "sticky"
Say aggregate demand increases and shifts to the right. How will the economy shift to adjust from the short-run equilibrium point to the new long run?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left.
