Quiz 2

In defense of economic growth

Higher standard of living. Human imagination can solve environmental and resource issues.

Demand factor

Households, businesses, and government must purchase the economy's expanding output.

Economic growth qualifications

Improved products and services. Added leisure. Other impacts.

Supply factors

Increases in quantity and quality of natural resources. Increases in quality and quantity of human resources. Increases in supply or stocks of capital goods. Improvements in technology.

This a measure of economic growth that is most useful for comparing living standards?

Increases in real GDP per capita

Demand-pull inflation

Increases in the price level resulting from increases in aggregate demand. Continues as long as the excess spending continues.

Leader countries

Invent technology.

Criticisms of unemployment

Involuntary part-time workers counted as full-time. Discouraged workers are not counted as unemployed.

Causes of shocks

Irregular innovation. Productivity changes. Monetary factors. Political events. Financial instability like the Great Recession.

Growth

Is the path to greater material abundance. Results in higher standards of living. Increases leisure time. Allows for the expansions and application of human knowledge.

The unemployment rate is interpreted as the percentage of the:

Labor force that are not employed

Noneconomic costs

Loss of skills and loss of self-respect. Plummeting morale. Family disintegration. Poverty and reduced hope. Heightened racial and ethnic tensions. Suicide, homicide, fatal heart attacks, mental illness. Can lead to violent social and political change.

Efficiency factor

Must achieve economic efficiency and full employment.

Redistribution effects of inflation

Nominal income which is adjusted for inflation. Real income which is nominal income adjusted for inflation. Anticipated versus unanticipated income.

Growth-promoting institutional structures include:

Patents and copyrights. Efficient financial institutions. Stable political system.

Who's unaffected by inflation?

Flexible-income receivers such as COLAs, social security recipient, and union member. Debtors pay back the loan with cheaper dollars.

Frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployment workers between jobs.

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation. Devastates an economy. Businesses don't know what to charge. Consumers do not know what to pay. Money becomes worthless. Example is Zimbabwe's 14.9 billion percent inflation in 2008.

Follower countries

Adopt technology and can grow faster.

Unanticipated inflation

An increase of the price level at a rate greater than expected.

Consumer price index

An index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer.

Can economic growth survive population decline?

As nations industrialize, their economies shift from agriculture to industry leading to: fertility rates to fall, decrease in population, and each generation smaller than the one before. Inverse dependency ratio.

Modern economic growth

Began with the Industrial Revolution in late 1700s. Ongoing increases in living standards. Time for leisure. Social change. Democracy. Human lifespan doubled. Began in Britain. Has spread slowly. Starting date main cause of worldwide diff in living standards. Catching up is possible.

The inflation rate measures the percentage growth rate of:

CPI from one year to the next

Inflation

General rise in the price level. Inflation reduces the "purchasing power" of money. CPI, Consumer Price Index.

(COLA)

Cost-of-living adjustment. An automatic increase in the incomes (wages) of workers when inflation occurs; often included in collective bargaining agreements between firms and unions. Cost-of-living adjustments are also guaranteed by law for Social Security benefits and certain other government transfer payments.

Inflation caused by a rise in the prices of inputs is referred to as:

Cost-push inflation

Does inflation affect output?

Cost-push inflation which reduces real output and redistributes a decreased level of real income. Demand-pull inflation which one view is that zero inflation is best and another view is that mild inflation is best.

A headline states: "Real GDP falls again as the economy slumps." This condition is most likely to produce what type of unemployment?

Cyclical

Types of Inflation

Demand-Pull inflation and Cost-Pull inflation. Difficult to distinguish the types. Types differ in sustainability such as cost-push ends in recession.

Cost-pull inflation

Due to the rise in per-unit input costs. Supply shocks. Ends in recession.

Antigrowth view

Environment and resource issues.

Who's hurt by inflation?

Fixed-income receivers such as real incomes fall. Savers which value of accumulated savings deteriorates. Creditors which lenders get paid back in cheaper dollars.

Productivity growth

Pay higher wages without lowering profits. Microchip/info technology. Start up firms and increasing returns which lead to: more specialized inputs, spreading of development costs, simultaneous consumption, network effects, learning by doing. Global competition.

A recession is a decline in:

Real GDP that lasts six months or longer

Anticipated inflation

Real interest rate which is that rates are adjusted for inflation. Nominal interest rate is that rates are not adjusted for inflation.

Average rate of growth affects:

Real output, real income, and real wages.

A major effect of the rise in the rate of productivity growth in the United States is a(n):

Rise in the growth of living standards

Inverse dependency ratio

Social security issues. Innovation and productivity.

Institutional structures of growth

Strong property rights. Patents and copyrights. Efficient financial institutions. Literacy and widespread education. Free trade. Competitive market system.

Determinants of growth

Supply factors, demand factors, and efficiency factors.

Factors affecting productivity of growth:

Tech advance, quantity of capital, education and training, economies of scale and resource allocation.

The factor accounting for the largest increase in the productivity of labor in the United States has been:

Technological advance

Real income

The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.

Natural unemployment

The full-employment rate of unemployment; the unemployment rate occurring when there's no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation. Can vary over time because demographic changes, changing job search methods, and public policy changes.

Okun's law

The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP).

Nominal income

The number of dollars received by an individual or group for its resources during some period of time.

Peak

The point in a business cycle at which business activity has reached a temporary maximum; the point at which an expansion ends and a recession begins. the economy is near or at full employment and the level of real output is at or very close to the economy's capacity.

An antigrowth view would be that there may be a significant tradeoff between productivity and:

The quality of life

Structural unemployment

Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.

Cyclical unemployment

When there is a recession, no one comes in, workers get layed off. Insufficient total spending or insufficient aggregate demand and which typically begins in the recession phase of the business cycle.

Core inflation

Without food and energy goods. Focuses on more stable prices.