ECN 211 Exam 3

Economic freedom

A condition in which people are able to make personal choices, their private property is protected by the rule of law, and they are free to buy and sell in markets

Increase

A decrease in wage rate leads to a(n) ________ in AS (curve will shift to the right)

Recessionary gap

A gap that exists when potential GDP exceeds real GDP and that brings a falling price level.

Inflationary gap

A gap that exists when real GDP exceeds potential GDP and that brings a rising price level

Real GDP, population

The formula for determining standard of living is: a % change of ______ ______ - % change in _______.

Marginal propensity to consume

The fraction of a change in disposable income that is spent on consumption- the change in consumption expenditure divided by the change in disposable income that brought it about.

Marginal tax rate

The fraction of a change in real GDP that is paid in income taxes-the change in tax payments divided by the change in real GDP

Marginal propensity to import

The fraction of an increase in real GDP that is spent on imports- the change in imports divided by the change in real GDP

Neoclassical

The growth theory that real GDP per person will increase as long as technology keeps advancing. Economic growth DEPENDS on technology. This theory cannot explain why there was an increase in technology. They believe that they were totally random occurrences. This theory also stated that an increase in productivity does NOT lead to a higher population. They believed that population changes depended on the opportunity cost of children. (Many people have decided not to have kids because the opportunity cost is too high).

Rule of 70

The number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable

Labor Productivity

What source of economic growth makes the biggest impact?

Full-employment equilibrium

When equilibrium real GDP equals potential GDP

Above full-employment equilibrium

When equilibrium real GDP exceeds potential GDP

Below full-employment equilibrium

When potential GDP exceeds equilibrium real GDP

Stagflation

A combination of recession (falling real GDP) and inflation (rising price level)

Human capital

A change in _____ _______: includes the accumulated skill and knowledge of people. It is the knowledge, training and experience people have. The expansion of this fundamental directly increases labor productivity and is the source of the discovery of new technologies. The better educated people are, the more productive they are. If you work less, but produce more, then economic growth will occur. It is part of a change in labor productivity.

Physical capital

A change in ______ ______: Savings and investment in this increase the amount of capital per worker and increase labor productivity. It has added incredibly to the productivity of our labor. They consist of Manmade factors of production. Things we produce that makes it more productive to produce other things) More or this = more efficient and productive. It is part of a change in labor productivity.

Technology

A change in ________: includes the technique/ knowledge we have about the production process. As we improve this, we get more efficient use of the physical and human capital that we have. The more of this we have = more productive = increases economic growth

Increase

A(n) _______ in expected future inflation increases aggregate demand because people decide to buy more goods and services now before their prices rise.

Decrease

A(n) ________ in expected future income, future inflation, or future profit has the opposite effect and decreases aggregate demand.

expected future income

An increase in _____ _______ ______ increases the amount of consumption goods that people plan to buy now and aggregate demand increases.

Decrease

An increase in wage rate leads to ________ in AS (curve will shift to the left)

Malthusian theory

Another name for classical growth theory- named for Thomas Robert Malthus

Real GDP per person

Real GDP divided by the population

Fiscal policy

Changing taxes, transfer payments, and government expenditures on goods and services

Monetary policy

Changing the quantity of money and the interest rate.

Shifts

If I change labor productivity, I change the production function. The curve ______ upward. An increase of labor productivity ______ the production curve upward. This occurs based on changes in physical capital, human capital, or technology (changes in labor productivity).

70/ growth rate

In the rule of 72 equation, the years to double = ______ / ______

Declining, increases

It the population growth rate is _______ it creates problems. If growth rate is higher, then the standard of living _______.

Inflation

Negative GDP Gap = GDP is greater than potential GDP. It means that we are in a state of _______ and are trying to produce more than is possible.

Population declining

One growth rate problem is the ________ _______. As the population ages, there is a problem with the labor force. More people are retiring than those entering the labor force (Ex: Japan). In Japan, they have had to import workers in to the country. The jobs are less paying and are the jobs that the Japanese people do not want to do. It also creates social problems due to the language barriers and the fact that the Japanese do not want to give the out of country workers citizenship and benefits. This will cause social strain.

International trade

Out of the four government policies for promoting an increase in economic growth, this one has to do with encouraging ____ _____. Countries open to this grow faster than those closed to trade. It is ESSENTIAL for economic growth

education, health

Out of the four government policies for promoting an increase in economic growth, this one has to do with encouraging ____ and ______.

Research

Out of the four government policies for promoting an increase in economic growth, this one has to do with encouraging ____ and development.

investments

Out of the four government policies for promoting an increase in economic growth, this one has to do with encouraging ____ and savings.

Aggregate planned expenditure

Planned consumption expenditure plus planned investment, plus planned government expenditure, plus planned exports minus planned imports

Recession

Positive GDP gap = Potential GDP is larger than GDP. It means that there is a _________ and we are not producing up to our potential.

Multiplier

The amount by which a change in any component of autonomous expenditure is magnified or multiplied to determine the change that it generates in equilibrium expenditure and real GDP

Economic growth rate

The annual percentage change of real GDP

Population, week, participation rate

The change in aggregate hours includes a change in ________, average work ______, and change in labor force _______ _______

Standard of Living

The change in real GDP per person. This depends on real GDP per person which is real GDP divided by the population. So the contribution of real GDP growth to the change in this on the growth rate of real GDP per person. It helps determine how much output is available PER PERSON (it is not a perfect measure, like normal GDP biases).

Faster, 2.1

The real GDP per person grows only if real GDP grows ______ than the population grows. To maintain a population, it needs to grow at an increase of _______% per year or the birth and death rate will not even out.

Consumption function

The relationship between consumption expenditure and disposable income, other things remaining the same.

Aggregate demand

The relationship between the quantity of real GDP demanded and the price level when all other influences on expenditure plans remain the same.

Aggregate supply

The relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same. Other things remaining the same, the higher the price level, the greater the quantity of real GDP supplied, and the lower the price level, the smaller the quantity of real GDP supplied.

Religion

What is one social problem some European countries are facing from importing Middle Easterners in to Europe?

New growth theory

The theory that our unlimited wants will lead us to ever greater productivity and perpetual economic growth.

Neoclassical growth theory

The theory that real GDP per person will increase as long as technology keeps advancing.

Classical growth rate

The theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end.

Aggregate hours, labor productivity

The two sources of growth is a change in ______ ______ and ______ ______.

Real GDP

The value of all goods and services that are adjusted for inflation.

Classical

This growth theory predicts the clash between an exploding population and limited resources will eventually bring economic growth to an end. Thomas Malthus- wrote about economic issues. He argued that there is no long run growth possible. An increase in productivity leads to an increase in population which leads to a DECREASE in productivity/output per person. There is a natural tendency for people to have more kids and have more mouths to feeds leading to a decrease to provide for people.

Labor productivity

This is the measure of output/hours worked. It is the quantity of real GDP produced by one hour of labor.

Production function

This shows diminishing returns. If there is an increase in workers, it increases the amount of output, but by diminishing amounts. If I have 100 workers, I may produce 6 units of output. 300, I produce 12 units of output. As I add more units of labor, output increases, but by a lesser amount.

Modern Theory of Growth

This theory states that our unlimited wants will lead us to ever greater productivity and perpetual economic growth. It explains the improved technology. Unlimited wants lead to people making choices. These choices lead to an increased output and change in technology (increased profits). Unlimited wants --> choices --> increased output and technology --> increased profits. Profits spur competition --> spurs technology (Ex: cell phones. If you don't stay current, the market will sweep you away).

Dismal science

Thomas Malthus looked at economic growth throughout history for centuries and centuries. _______ ________ is the population grows so large that labor productivity falls and returns real GDP per person back to the subsistence level. When the year 1750 hit, economic growth began to increase significantly and the classical theory was not accurate anymore.

Labor, technology, wage rate

What are the three factors causing a shift in the aggregate supply curve? A change in productivity of _____, _____, and ______ _______.

Expectations, monetary, fiscal, exchange

What are the three shifts in the aggregate demand curve? A change in _____, ______ and ______ policy, and ______ rate.

Classical, Neoclassical, New Theory

What are the three sources of economic growth theories?

Foreign trade effect

When the US price level rises and other things remain the same, the prices in other countries do not change. So a rise in the US price level makes US-made goods and services more expensive relative to foreign-made goods and services. This change in real prices encourages people to spend less on US-made items and more on foreign- made items.

Interest rate effect

When the price level rises, the real interest rate rises. An increase in the price level increases the amount of money that people want to hold- increases the demand for money. When the demand for money increases, the nominal interest rate rises.

Macroeconomic equilibrium

When the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS curve

Equilibrium expenditure

the level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP

Labor productivity

the quantity of real GDP produced by one hour of labor.