Macro Midterm - 2

financial intermediaries

institutions through which savers can indirectly provide funds to borrowers. Includes banks and mutual funds.

Where does the demand for loanable funds come from?

investment

What happens to public savings when there's an increase in the government budget surplus

public savings is positive and increasing

L

quantity of labor

Y

real GDP - quantity of output produced

When a nation's workers are very productive what happens to GDP and Incomes?

real GDP is large and incomes are high

What is income per person equal to?

real GDP per person

How to increase human capital

Increase education

What does a government budget deficit do to national savings?

It reduces national savings.

What does a country's standard of living depend on?

It's ability to produce goods and services which depends on productivity

budget deficit equation

G-T

Economic progress

Growth of real GDP per person

Three policies that boost productivity growth

increase savings and thus capital accumulation, increase technological knowledge, increase human capital

mutual funds

institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

What is national savings (S) equal to in a closed economy?

I

national saving equation

I=Y-C-G

productivity growth when a worker starts with little physical capital

If given more K, it will increase their productivity by a lot

productivity growth when a worker starts with a lot of physical capital

If given more K, their productivity will only increase a little

What does a higher saving rate imply in the long-run due to diminishing returns?

Implies a higher productivity LEVEL but not a higher productivity GROWTH

Which of the following pairs of terms refer to the same thing? -"Capital" and "physical capital" -"Technological knowledge" and -"human capital" -"Standard of living" and "human capital" -"Standard of living" and "prudctivity"

"Capital" and "physical capital"

policy to increase technological progress -patent laws -the incentives or direct support for private sector R&D -grants for basic research at universities -all of the above

All of the above

Which of the following is an example of human capital -A student loan -Knowledge learned from reading books -Training videos for new corporate employees -All of the above are correct

All of the above are correct

Why aren't natural resources necessarily a limit to growth?

As a resource becomes scarcer, its market price rises, which increases the incentive to conserve it and develop alternatives

True or False: If it could increase its growth rate slightly, a country with low income would catch up with rich countries in about ten years.

False

True or false: Saving explains the constant growth rate of productivity experienced by the United States

False

True or false: Technological progress means faster computers, a higher-definition TV, or a smaller cell phone

False

True or false: child mortality increases with an increasing income

False

True or false: countries with outward oriented policies have generally failed to create growth

False

True or false: poor countries are doomed to poverty forever

False

Is investment important for short term or long term economic growth?

Long term

Where does the supply of loanable funds come from?

Saving

How population growth may affect living standards

Stretching natural resources, dilution the capital stock , and promoting tech progress

Public saving equation

T-G

budget surplus equation

T-G

What is the main determinant of the productivity growth experienced by the United States in the last century? -Technological knowledge -Physical capital per worker -Natural resources per worker -Human capital per worker

Technological knowledge

What is the main reason why living standards rise over the long run

Technological progress - because knowledge is a public good therefor ideas can be shared freely, increasing the productivity of many

financial markets

institutions through which savers can directly provide funds to borrowers. Includes the bond market and the stock market.

True of false: life expectancy increases with income

True

True or False: Investment is not the purchase of stocks and bonds

True

True or False: countries don't need to have a lot of natural resources to be rich

True

True or False: countries with fast population growth tend to have lower educational attainment

True

True or False: healthier workers are more productive

True

True or false: In a closed economy, national saving equals investment?

True

True or false: In the U.S., each year of schooling raises a worker's wage by 10%

True

True or false: due to diminishing returns, as physical capital rises, the extra output from an additional unit of physical capital falls

True

True or false: improvements in technology (increase in A) allows more output (Y) to be produced from any given combination of inputs

True

True or false: return for the society is higher than return for the individual when there is an increase in tech knowledge and education

True

Assume that China and the USA have the same production function, technological knowledge, and natural resources, but different levels of physical capital per worker. Assume the USA has more physical capital than China. Which of the following is true? -USA has higher productivity growth but lower productivity -USA has lower productivity growth but higher productivity -USA has lower productivity growth and higher productivity -USA has lower productivity growth and lower productivity

USA has lower productivity growth but higher productivity

Other things equal, N allows a country to produce more _______ -H -K -Y -L

Y

private saving equation

Y-T-C

How does an increase in N/L affect productivity?

Y/L increases

What happens to productivity when H/L increases?

Y/L increases

what happens to productivity when K/L increases

Y/L increases

Production function

Y=AF(L,K,H,N)

What is national income identity in a closed economy

Y=C+I+G+NX

foreign portfolio investment

a capital investment financed with foreign money but operated by domestic residents

foreign direct investment

a capital investment that is owned and operated by a foreign entity

What is a bond?

a certificate of indebtedness

What is a stock?

a claim to partial ownership in a firm

Budget deficit

a shortfall of tax revenue from govt spending (-public saving)

Inward oriented policies

aim the raise living standards by avoiding interaction with other countries

budget surplus

an excess of tax revenue over govt. spending (public saving)

If the demand for loanable funds shifts to the right, then the equilibrium interest rate -and quantity of loanable funds fall -rises and the quantity of loanable funds falls -falls and the quantity of loanable funds rises -and the quantity of loanable funds rise

and the quantity of loanable funds rise

Technological progress

any advance in knowledge that boosts productivity - allows society to get more output from its resources

How does the government finance deficits?

by borrowing (selling government bonds)

K/L

capital per worker

Constant return to scale

changing all inputs by the same percentage causes output to change by that percent

What are the main types of financial institutions in the U.S.

financial markets and financial intermediaries

roles of a bank

first role: take deposit and make loan second role: increase money supply

What can the government encourage to raise capital per worker

foreign direct investment and foreign portfolio investment

H

human capital

Greg learns how to bake from his grandmother. This is an example of -both human capital and technological knowledge -human capital, but not technological knowledge -neither human capital nor technological knowledge -technological knowledge, but not human capital

human capital, but not technological knowledge

loanable fund

income that people have chosen to save and lend out rather than use for their own consumption, and to the amount that investors have chosen to borrow

saving and investment

increase in K requires investment, and since resources are scarce more K requires fewer consumption of goods reducing consumption=increasing saving. this extra saving funds the production of investment goods

Economic prosperity

level of real GDP per person

A

level of technology

What happens to living standards when productivity grows rapidly?

living standards also grow rapidly

K

physical capital

what determines productivity and it's growth rate?

physical capital, human capital, natural resources, and technological knowledge

The catch up effect

poor countries tend to grow more rapidly than rich ones

National saving

private saving plus public saving

Y/L

productivity - output per worker

outward oriented policies

promote integration with the world economy. The elimination of restrictions on trade or foreign investment

In a closed economy, what does the difference between the tax revenue and government purchases (T-G) represent? -private saving -investment -national saving -public saving

public saving

What's the difference between saving and investment?

saving is lower-risk and lower-return.

what does cyclical unemployment refer to

short-run fluctuations around the natural rate of unemployment

Technological knowledge

society's understanding of the best ways to produce goods and services

dollar bills, rare paintings, and emerald necklaces are all -stores of value -media of exchange -extremely liquid assets -units of account

stores of value

Public saving

tax revenue less government spending

What is the quantity of loanable funds demanded

taxes (minus transfers) plus government purchases

Tech. Knowledge vs. Human capital

technological knowledge refers to society's understanding of how to produce goods and services while human capital results from the effort people expend to acquire this knowledge

productivity

the average quantity of goods and service produced per unit of labor input

H/L

the average worker's human capital

crowding out

the government borrows to finance it's deficits, leaving less funds available for investment

financial system

the group of institutions that helps match the saving of one person with the investment of another

natural resources

the inputs into production that nature provides (land, mineral, deposits)

What adjusts to to balance supply and demand in the loanable funds market?

the interest rate

human capital

the knowledge and skills workers acquire through education, training, and experience

which of the following is a good gauage of economic progress - the level of real GDP per person, but not the growth rate of real GDP per person -The level of real GDP per person and the growth rate of real GDP per person -The growth rate of real GDP per person, but not the level of real GDP per person -Neither the level nor the growth rate of real GDP per person

the level of real GDP per person, but not the growth rate of real GDP per person

private saving

the portion of households income that is not used for consumption or paying taxes

investment

the purchase of new capital

Which of the following can be measured by the level of real GDP per person? -the standard of living but not productivity -productivity but no the standard of living -neither the standard of living nor productvity -productivity and the standard of living

the standard of living but not productivity

physical capital

the stock of equipment and structures used to produce goods and services

the natural rate of unemployment -is closely associated with the ups and downs in economic activity -varies less than the measured unemployment rate -is set by the federal reserve -cannot be changed by government policy

varies less than the measured unemployment rate

Diminishing returns

when the govt implements policies that raise investment, then K will rise, which causes productivity and living standards to rise