Chapter 10

Question 1

economy to be “strong” vs “weak” - short term

Answer 1

refers to the business cycle
alternating periods of economic expansion and recession

Question 2

economy to be “strong” vs “weak” - long term

Answer 2

refers to the process by which rising productivity increases average standard of living

Question 3

the most commonly used measure of this average standard of living is

Answer 3

real GDP per capita

Question 4

real GDP per capita

Answer 4

production in the economy, per person, adjusted for changes in price level

Question 5

with the rise of real GDP per capita, he average american

Answer 5

can buy more than 8x as many goods and services now as in 1950

Question 6

why is real GDP per capita higher?

Answer 6

life expectancy, wealth, democracy

Question 7

economic prosperity and health go hand-in-hand because

Answer 7

the richer nations can devote more resources to improving the health of their citizens (more healthy the more productive)

Question 8

while growth in real GDP per capita is an important measure of our improvement, another important measure is the increase in our ___ ; these have also increased markedly over the last century

Answer 8

lifespans

Question 9

another good measure of our economic prosperity is the amount of time we can spend on

Answer 9

leisure
-as our lifespan grows, we can spend more time on leisure
-increased productivity also means less time needed working, and more time for leisure

Question 10

the growth rate of an economic variable like real GDP or real GDP per capita is equal to

Answer 10

the percentage change from one year to the next

Question 11

long periods formula for average annual growth rate

Answer 11

current real GDP = previous real GDP x ( I + G )^t

Question 12

g=

Answer 12

annual growth rate

Question 13

t=

Answer 13

of years

Question 14

rule of 70

Answer 14

shortcut to help determine how long it will take for an economic variable to double

Question 15

rule of 70 equation

Answer 15

of years to double = 70/g

Question 16

if the growth rate is 5%, it will take about ___ for the variable to double

Answer 16

70/5 = 14 years

Question 17

what causes increases in real GDP per capita?

Answer 17

increases in labor productivity

Question 18

labor productivity

Answer 18

quantity of good/services that can be produced by one worker (or by one hour of work)

Question 19

most of the answer to “what determines the rate of long-run growth” is the same answer to

Answer 19

“what determines labor productivity growth”

Question 20

capital

Answer 20

manufactured goods that are used to produce other goods and services

Question 21

the more capital a worker has available to use,

Answer 21

the more productive they will be (also true for human capital)

Question 22

for technological improvements in capital, we can say

Answer 22

“more capital” and “better capital” cause growth

Question 23

potential GDP

Answer 23

refers to the level of real GDP is attained when all firms are operating at capacity

Question 24

capacity

Answer 24

refers to “normal” hours and a “normal” sized workforce

Question 25

potential GDP rises when

Answer 25

the labor force expands, when a nation acquires more capital stock, or when new technologies are created

Question 26

the growth in potential GDP in the US has been relatively steady at about ___ that is, the potential to produce final goods and services has been growing in the US at about this rate over time

Answer 26

2-3%

Question 27

the recession of 2007-2009 resulted in a wider than usual gap between

Answer 27

potential and actual GDP

Question 28

how can actual GDP > potential GDP

Answer 28

people, capital, working longer hours than normal "overheated" economy, inflation may result

Question 29

microeconomics

Answer 29

firms want to grow, expand, get more market share, etc

Question 30

firms can finance some of their own expansion through

Answer 30

retained earnings

Question 31

firms often want to obtain more funds for expansion than are available in this way,

Answer 31

and get them in a more immediate time period

Question 32

financial system

Answer 32

the system of financial markets and financial intermediaries through which firms acquire funds from households

Question 33

financial markets

Answer 33

markets where financial securities, such as stocks and bonds, are bought and sold

Question 34

financial security

Answer 34

a document (often electronic) states the terms under which funds pass from the buyer of the security to the seller

Question 35

stock

Answer 35

a financial security representing partial ownership of a firm

Question 36

bond

Answer 36

is a financial security promising to repay a fixed amount of funds -essentially a loan from a household to a firm

Question 37

financial intermediaries

Answer 37

firms, such as banks, mutual funds, pension funds, and insurance companies borrow funds from savers and lend them to borrowers

Question 38

mutual funds

Answer 38

sell shares to savers then use the funds to buy financial securities

Question 39

the financial system provides three key services

Answer 39

risk-sharing, liquidity, information

Question 40

risk-sharing: by allowing investors to spread their money over many different assets,

Answer 40

investors can reduce their risk while maintaining a high expected return on their investment

Question 41

liquidity

Answer 41

allows savers to quickly convert their investments into cash

Question 42

information

Answer 42

prices of securities, represent the beliefs of other investors and intermediaries about the future payoffs from holding those securities

Question 43

the total value of saving in the economy must equal

Answer 43

the total value of investment

Question 44

equation for closed economy

Answer 44

Y = C + I + G

Question 45

rearrange equation for investments

Answer 45

I = Y - C - G

Question 46

private savings

Answer 46

savings by households

Question 47

public savings

Answer 47

from the government

Question 48

Sprivate is equal to all household income that is not spent

Answer 48

Sprivate = Y + TR - C - T

Question 49

Spublic =

Answer 49

T - G - TR

Question 50

total savings is

Answer 50

S = Sprivate + Spublic

Question 51

Spublic is zero

Answer 51

balance budget the government spends as much as it brings in

Question 52

total savings simplified

Answer 52

savings = investment

Question 53

Spublic is positive

Answer 53

budget surplus (very rare, last time 2001)

Question 54

Spublic is negative

Answer 54

budget deficit

Question 55

funding deficit

Answer 55

government borrows money by selling treasury security - later: this may "crowd out" private investments

Question 56

market for loanable funds

Answer 56

(conceptual) interaction between borrowers and savers

Question 57

quality of funds traded

Answer 57

the price of money is the interest rate

Question 58

firms are the demanders of loanable funds

Answer 58

they have a higher quality demanded of funds at lower interest rates, ceteris paribus

Question 59

demand for funds has a

Answer 59

downward slope

Question 60

households will save (more/less) funds at

Answer 60

(higher/lower) interest rates, ceteris paribus

Question 61

if there is a technological advancements the demand shifts to the right because

Answer 61

firms will want to borrow and invest more funds at all interest rates

Question 62

suppose the government runs a budget deficit

Answer 62

government borrows money by selling treasury securities. this takes away money from households, decreasing supply of funds

Question 63

crowding out

Answer 63

decrease in investment spending due to an increase in government purchases spending

Question 64

government borrowing at an increase of 1% of GDP will lead to

Answer 64

increase interest by 0.003 points

Question 65

why is the effect so small?

Answer 65

interest rates are affected by many factors including global markets, a few billion dollars is pretty small

Question 66

if any non-interest rate factor changes to make consumers want to save (more/less)

Answer 66

supply shifts (right/left)

Question 67

if any non-interest rate factor changes so that firms want to borrow (more/less)

Answer 67

demand shift (right/less)