C3 The Short Run and the Long Run

Question 1

does the labor force and population growth grow at pretty much the same rate?

Answer 1

it does in the long run but changes in the age of the average population or net immigration can make fluctuations in the short term

Question 2

since GPD is production and that is output GDP can be expressed as the total labor force times…?

Answer 2

the amount each worker produces

[Q = L x (Q / L)]

Question 3

the economic growth over the past 50 years has been an average of 2.8% but it is slowing due to an ____ population and as the economy changes from _____ to _____ we may expect it to grow at _____.

Answer 3

the economic growth over the past 50 years has been an average of 2.8% but it is slowing due to an aging population and as the economy changes from manufacturing to services we may expect it to grow at 2.25%

Question 4

In many ways the long run economic trend is a supply side concept, a measure of what the economy can produce given normal growth of the labor force and normal productivity gains. Trying to produce more than that for very long would ultimately require…?

Answer 4

digging much deeper into the population to find more willing and suitably skilled workers, along with getting more raw materials and other inputs.

Question 5

what is potential GPD?

Answer 5

the level of GDP that the economy can produce without putting extra demands that exceed the normal growth but also without leaving any resources seriously unemployed.

Question 6

what is the GDP gap

Answer 6

it is the difference in real GDP and potenial GDP (usually illistrated on a line chart)

Question 7

how many downturns has the US experienced since 1960, what has been the average length of the recessions, and what has been the average length of each recovery?

Answer 7

Their have been 8 downturns since 1960. The average recession length has been 11 months. The average recovery length has been close to 5 and 1/2 years.

Question 8

unemployment is not the only waste of labor resources in a downturn but many people are underemployed, meaning…?

Answer 8

they are underemployed relative to their skill levels, a former engineer or business executive may be flipping burgers or driving uber

Note: increasing the labor forces skill level alone will not solve the problem of not achieving maximum production because the demand for labor wanes with a downturn. The only way is to create new industries as well. Remember the amount of work is not fixed.

Question 9

is debt a stock or a flow?

Answer 9

stock

Question 10

deficits are the flow of new debt that add to the debt stock. True or false?

Answer 10

true

Question 11

why is the goverment debt (held by the public) relative to GDP ratio important?

Answer 11

because whether the goverment repays the principal or not it has to collect enough taxes to service the debt interest or else it will default. As the debt-to-GDP ratio grows very large the ability to collect enough taxes to avoid default becomes questionable because the GDP serves as the tax base.

Example: at a 5% interest rate, a debt/GDP value of 1 means that taxes equal to 5% of GDP must be collected just to service the debt interest. (This doesn’t include running the goverment)

Question 12

primary deficit

Answer 12

is deficit spending over tax revenues not counting spending on debt interest

Question 13

as long as nominal GDP (real GDP plus inflation) exceeds the _____ ______ _____, a regular primary deficit can exist without destroying sustainability.

Answer 13

as long as nominal GDP (real GDP plus inflation) exceeds the debt interest rate, a regular primary deficit can exist without destroying sustainability.

Question 14

Credit market

Answer 14

Credit market refers to the market through which companies and governments issue debt to investors, such as investment-grade bonds, junk bonds and short-term commercial paper

Question 15

as the debt-to-GDP ratio climbs higher the credit market pressures drive the ____ ____ higher.

Answer 15

as the debt-to-GDP ratio climbs higher the credit market pressures drive the interest rates higher.

[Why: because the bonds get more risky so the inverstors demand higher yields?]

Question 16

expansionary fiscal policy

Answer 16

increasing goverment spending on goods and services and/or reducing taxes to increase aggregate demand

Question 17

expansionary monetary policy

Answer 17

means increasing the supply of money and/or cutting the official interest rate (the rate at which commercial banks borrow from each other) in order to encourage consumers to spend and firms to invest.

Question 18

liquidity trap

Answer 18

when the official interest rate is at (or close to) zero not much more can be done with conventional monetary policy

Question 19

sus·tain·a·bil·i·ty

Answer 19

noun

the ability to be maintained at a certain rate or level.

“the sustainability of economic growth”

Question 20

mon·e·tar·y

Answer 20

adjective

relating to money or currency.

“documents with little or no monetary value”

synonyms: financial, money, cash,

Question 21

fis·cal

Answer 21

adjective

relating to government revenue, especially taxes.

synonyms: tax, budgetary, revenue;

Question 22

quantative easing (QE)

Answer 22

also known as large-scale asset purchases, is a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject money directly into the economy.

Question 23

what two advantages does monetary policy have over fiscal policy as a demand management tool?

Answer 23

1. Monetary policy is changed more easily. The Fed is a politically independent institution and can move quickly to raise or lower the money supply and alter interest rates as it sees fit.
2. Fiscal policy can only be changed by congressional action and presidental accord which is a slow process. And excessive use of fiscal policy can lead to a buildup of public debt.

Question 24

which is easier to change: monetary policy or fiscal policy?

Answer 24

monetary policy

Question 25

Federal Reserve or simply the Fed is...?

Answer 25

is the central banking system of the United States of America

Question 26

central bank

Answer 26

reserve bank, or monetary authority is the institution that **manages the currency, money supply, and interest rates of a state** or formal monetary union,[1] and oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and also generally controls the printing/coining of the national currency,[2] which serves as the state's legal tender.[3] A central bank also acts as a lender of last resort to the banking sector during times of financial crisis. Most central banks also have supervisory and regulatory powers to ensure the solvency of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior by member banks.