Unit 8

Question 1

Economic growth primarily comes from 3 things:

Answer 1

1. More Labor
2. More capital
3. Better use of labor + capital (aka-productivity growth)

Question 2

Labor Productivity

Answer 2

-Output per worker (output per hour)
-The most important factor in long-term economic growth
-Inc productivity allows workers to produce more w/ same amount of labor

Question 3

How can economies increase labor productivity and produce economic growth?

Answer 3

-By increasing available technology
-To increase productivity, we need changes in capital stock:
-more physical capital (machines, factories, etc)
-more human capital
-tech improvements

Question 4

Investment Spending

Answer 4

Unplanned inventory investment + Planned investment spending

Question 5

Unplanned Inventory Investment

Answer 5

Occurs when actual sales are lower than businesses expected. Businesses front the bill when inventories rise because that means consumers are not buying business products.

Question 6

Planned Investment Spending

Answer 6

Occurs when businesses intend to take on spending. This depends on the level of interest rates in the economy, and expected levels of rGDP. Planned investment includes spending on capital stock such as new offices, facotries or machinery, computer software and other equipment used to assist labor in the production of goods and services.

Question 7

How does unplanned inventory change with the business cycle?

Answer 7

In a recession, unplanned inventories will increase

Question 8

How can investment spending impact long-term GDP growth? What type of investment spending will impact long-term growth?

Answer 8

Investment spending on capital goods can inc long-term growth

Question 9

Why is investment demand downward sloping?

Answer 9

At high interest rates, only the projects with a high return will want a loan

Question 10

Shifters of Investment Demand

Answer 10

1. Changes in the costs of doing business
2. Changes in business taxes (tax credits for investment–gov policy to spur investment)
3. Changes in business outlook
4. Changes in tech

Question 11

Crowding out

Answer 11

occurs when gov borrowing drives up interest rates and reduces private investment spending

Question 12

Impact of crowding out in the long run

Answer 12

If investment spending is reduced, long-term growth will decline bc there will be fewer capital goods/stock

Question 13

Tax Credits

Answer 13

-Reduce taxes owed by individuals/businesses
-Can create incentives that increase desired behaviors (buying EVs, buisness investment spending, etc)

Question 14

LRAS will shift when…

Answer 14

there have been changes in INVESTMENT and, therefore, in capital stock or there have ben changes in labor productivity

Question 15

LRAS will NOT shift when…

Answer 15

there are changes in C, G, X, or M.

Question 16

Investment Demand Graph

Answer 16

RIR vs. Quantity; graph = investment demand

Question 17

What causes movement along the investment demand curve?

Answer 17

Changes in administered rates/interest rates

Question 18

Impact of shifts in investment demand on LRAS and PPC?

Answer 18

Increasing investment demand or increasing the supply of loanable funds will cause LRPC and the PPC to shift right. Watch out for catches about crowding out, though!! ***