Macroeconomics Final Study Guide
Why does the monetary policy curve slope upward?
- Monetary policymakers will follow the Taylor principle and respond aggressively to an increase in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises. - When inflation increases, the supply of real money balances declines. This increases the equilibrium nominal interest rate in the money market, which also increases the real interest rate in the short run.
The Bureau of Economic Analysis valued nominal U.S. gross domestic product (i.e., actual expenditure) at $14460 billion at the end of 2009. Suppose that the consumption expenditure was $10330 billion, planned investment spending was $1760 billion, and government spending was $2900 billion.
- Spending in net exports is $ -530 billion.
What can increase the equilibrium interest rate in the liquidity preference framework?
- The equilibrium interest rate increases if the Fed reduces the supply of real money balances. - The equilibrium interest rate increases if real income increases. - The equilibrium interest rate increases if the price level increases.
In a steady-state economy with no population growth, consumption per worker is 45, the saving rate is 25 percent, and the depreciation rate is 15 percent. The level of capital per worker is
100
Output per person is 170 in an economy in which 15 percent of the population are engaged in research and development, where their productivity is 0.002, and the total population size is 100 million. If this economy is on a balanced growth path, then output per person in the next period will be
177.3
If U.S. imports are valued at $2480 billion, calculate spending in U.S. exports.
1950 billion
The period referred to as the "Great Inflation" corresponds approximately to the decade of the
1970s
The IS curve is Y = 20 minus 1.5r, and the aggregate demand curve is Y = 15.5 minus 0.3pi. When the interest rate is 7 percent, the inflation rate is
20
Assume that the output per worker production function is: The saving and depreciation rates are estimated at 0.3 and 0.03, respectively.
400, 28
If productivity growth equals 3.0 percent, the contribution from capital growth 1.2 percent and the contribution from labor growth 2.0 percent, then output growth must equal
6.2
If the inflation rate target is 2%, the current inflation rate is 3%, and the output gap is 2%, then according to the Taylor rule, the nominal federal funds rate should be ________ percent.
6.5
Calculate the consumption expenditure using the consumption function and the following estimates: Autonomous consumption: $1310 billion Income: $11000 billion Taxes: $2000 billion Marginal propensity to consume: 0.6
6710 billion
Which element in the production function cannot be measured directly?
A
In what situations will the divine coincidence prevail?
A and B only. - An aggregate demand shock. - A permanent supply shock.
The distinction that macroeconomists make between flexible and sticky prices and wages hinges on
A and C only. - the time needed for long-run equilibrium values to be re-established following demand and supply shocks. - whether the markets setting prices and wages are competitive or monopolistic
Which of the following causes an increase in desired saving?
A decrease in autonomous consumption
How does a decrease in financial frictions affect planned investment spending?
A decrease in financial frictions reduces the real interest rate for investments and hence raises investment spending and aggregate demand.
Which of the following are the three primary functions that money performs in an economy?
A medium of exchange, a unit of account, and a store of value.
Why does the aggregate demand curve slope downward?
A rise in inflation works through the increase in real interest rates to reduce the equilibrium quantity of aggregate output
Why does the aggregate demand curve slope downward?
A rise in inflation works through the increase in real interest rates to reduce the equilibrium quantity of aggregate output.
Compare the following factors of production in terms of their rivalry and excludability:
A robot that welds car frames is rivalrous and excludable and the idea of building a car in an assembly line is nonrivalrous and nonexcludable . A recipe to make pancakes is nonrivalrous and nonexcludable and the recipe to manufacture a soda drink is nonrivalrous and highly excludable .
During the late 1960s Chinese authorities imposed the precepts of the "Cultural Revolution" on their people. As a result almost all scholars and researchers were sent to the fields to perform manual agricultural tasks.
According to the Romer model, the "Cultural Revolution" in China created a decrease in alpha , resulting in a decrease in the growth rate of output per worker .
Inhabitants of Pandora use stone beads as money. On average, every stone bead is used 4 times per year to carry out transactions. The total supply of beads is 20 million.
According to the quantity theory of money, the level of aggregate spending in Pandora must be 80 million. (Enter your response as a whole number.) Suppose now that the inhabitants of Pandora use less money to conduct the same number of transactions (i.e., each individual carries fewer beads). The velocity of money will increase .
According to the expectations-augmented Phillips curve, which of the following factors determines the rate of inflation?
All of the above are correct. - Expected inflation. - The degree of tightness in the labor market. - The difference between the unemployment rate and the natural rate of unemployment.
How does an increase in total factor productivity affect output per worker?
All of the above. - The economy will experience more investment per worker. - An increase in total factor productivity will increase output per worker. - The available capital and labor will become more productive.
Why does it slope downward?
As the real interest rate rises, consumption expenditure, planned investment spending, and net exports fall, which in turn lowers planned expenditure. Aggregate output must be lower for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping.
The Bureau of Economic Analysis valued nominal U.S. gross domestic product (i.e., actual expenditure) at $14 comma 460 billion at the end of 2009. Suppose that the consumption expenditure was $10 comma 300 billion, planned investment spending was $1 comma 740 billion, and government spending was $2 comma 510 billion.
Assuming the goods market is in equilibrium, calculate spending in net exports. Spending in net exports is $ negative 90 billion. If U.S. imports are valued at $2 comma 480 billion, calculate spending in U.S. exports. Spending in U.S. exports is $ 2390 billion.
Compared to classical macroeconomists, Keynesian macroeconomists view the typical market as being
Compared to classical macroeconomists, Keynesian macroeconomists view the typical market as being constrained by monopolistic forces. Given their market structure views, Keynesian macroeconomists see prices and wages as being largely inflexible . This view of Keynesian macroeconomists regarding the responsiveness of prices and wages to changing conditions suggests (to them) that the economy adjusts to long-run equilibrium rather slowly . For Keynesian macroeconomists, the economy's sluggish adjustment to long-run equilibrium makes government intervention necessary .
According to the consumption function, what variables determine aggregate spending on consumer goods and services?
Consumer spending depends on disposable income, the real interest rate, and other variables such as consumers' optimism and wealth.
Assume that low standards of living (i.e., low capital-labor ratio, in Solow's model terms) are the reason as to why some countries exhibit high fertility rates. Which of the following statements does not represent an effect from population control policies established to reduce fertility rates in countries with low standards of living?
Countries that have created population control policies have then experienced rapid growth in output.
What condition is required for equilibrium in the money market?
Equilibrium occurs when the quantity of real money balances demanded equals the quantity of real money balances supplied
What condition is required for equilibrium in the money market?
Equilibrium occurs when the quantity of real money balances demanded equals the quantity of real money balances supplied.
Based on the current level of the world real interest rate, the real interest rate that would prevail if this were a closed economy is higher than the world real interest rate.
False
What are open market operations?
Federal Reserve sales or purchases of bonds to or from banks.
What is the rule firms follow to determine how much of each input to hire in order to maximize profits?
Firms demand a quantity of each factor of production factor up until the marginal product of that factor falls to its real factor price.
Which of the following is not equivalent to a trade surplus?
I > S
What is the effect of an increase in domestic saving on the trade balance and net capital outflows?
If domestic saving increases, net capital outflows will rise and net exports will increase.
Why does the money market move toward equilibrium?
If the nominal interest rate is above its equilibrium value, people will purchase more bonds and bond prices will rise, causing the nominal interest rate to fall toward the equilibrium value. When the interest rate is below its equilibrium level, people will sell bonds and bond prices will fall, causing the interest rate to rise toward the equilibrium value.
How do the conditions required for goods market equilibrium differ in the two types of economies?
In a closed economy, goods market equilibrium occurs when saving equals investment; however, in an open economy, it can still be in equilibrium even when saving and investment are not equal.
What is the difference between a closed economy and an open economy?
In an open economy, economies are open to trade with one another, while in a closed economy, there is no trading between the different economies.
What shortcoming of the Solow growth model does the Romer model attempt to remedy?
In the Solow model, output per person eventually reaches a steady state, from which it grows no further.
Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all times, but sometimes we can stress one in particular. For each of the following situations, identify which function of money is emphasized. Brooke accepts money in exchange for performing her daily tasks at her office, since she knows she can use that money to buy goods and services.
In this case, money is being used as a medium of exchange . Tim wants to calculate the relative value of oranges and apples, and therefore checks the price per pound of each of these goods quoted in currency units. In this case, money is being used as a unit of account . Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account. In this case, money is being used as a store of value .
Which of the following justifies the assumption of adaptive expectations in Phillips curve analysis
Inflation expectations are sticky
A manufacturer of toys is employing 50 workers and using 15 pieces of equipment to assemble toys. Currently, the marginal product of labor is $12 and the marginal product of capital is $20. Assume the market prices for labor and capital are $12 and $20, respectively.
Is this firm maximizing its profit? Yes . What should this firm do with respect to its employees and its use of equipment? The firm should maintain the number of employees and maintain its use of equipment.
Why can the Fed control the real interest rate in the short run but not in the long run?
It adjusts for inflation, and prices are sticky in the short run. Hence, when a change in the Fed's monetary policy causes the nominal interest rate to change, the real interest rate also changes in the same direction. In the long run, actual and expected inflation change in response to changes in monetary policy, leaving the real interest rate unaffected.
What is the monetary policy curve?
It indicates the relationship between the inflation rate and the real interest rate.
What is the aggregate demand curve?
It is the relationship between the inflation rate and aggregate output when the goods market is in equilibrium
What is the aggregate demand curve?
It is the relationship between the inflation rate and aggregate output when the goods market is in equilibrium.
What does the IS curve show?
It shows equilibrium points in the goods market - the combinations of the real interest rate and equilibrium output.
What does the IS curve show?
It shows equilibrium points in the goods market-the combinations of the real interest rate and equilibrium output.
Would an increase in net exports affect the monetary policy curve?
No, the monetary policy curve does not shift.
What are open market operations?
Open market operations are purchases or sales of government securities.
What is hyperinflation?
Periods of extremely rapid price increases of more than 50 percent per month
What condition is required for equilibrium in the goods market?
Planned expenditure on goods and services must equal the actual amount of goods and services produced.
What has been the main cause of hyperinflation episodes?
Rapid growth of the money supply
What happens when policy makers respond to a temporary supply shock?
Shifting the aggregate demand curve to regain price stability will move the economy farther away from potential output.
Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007. Which of the following is a likely result of this increase in financial frictions?
The AD curve likely shifted left which caused a negative output gap
What open market operation can the Federal Reserve conduct to increase the money supply?
The Federal Reserve can purchase bonds from banks.
What is the significance of the Fisher effect?
The Fisher effect explains the relationship between expected inflation rates and nominal interest rates.
Suppose that a new Fed chair is appointed, and his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment; inflation has been at very low levels for quite some time; my priority is to ease monetary policy to promote employment." How would you expect the monetary policy curve to be affected, if at all?
The MP curve will shift downward because decreasing unemployment results in a loosening of monetary policy.
What is the effect on the marginal product of capital?
The MPK curve shifts upward.
How do changes in planned expenditures affect the aggregate demand curve?
The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease.
What would be the effect of an increase in U.S. net exports on the aggregate demand curve?
The aggregate demand curve shifts to the right.
How does the demand for real money balances respond to changes in each of these variables?
The demand for money is inversely related to the nominal interest rate and positively related to real income.
In Keynes's liquidity preference theory, what variables determine the demand for real money balances?
The demand for real money balances depends on the nominal interest rate and real income.
According to this theory, what determines the inflation rate?
The growth rate of the money supply
Does the new monetary policy curve represent an autonomous tightening or loosening of monetary policy?
The new monetary policy curve represents a tightening of monetary policy.
If desired saving increases, what happens to the real interest rate and desired investment?
The real interest rate decreases, which causes desired investment to increase.
The new graph to the right shows a leftward shift to the SRAS curve. Given what we know about activity in this economy, which of the following is likely true about this curve?
The shift depicts the supply shock itself.
Implementing stabilization policy is made more difficult by the presence of various time lags. Fill in the blanks below to match each description with the time lag it describes.
The time it takes to collect and process the data that indicate how well the economy is faring is known as the data lag . The time that policymakers may wait for data that support their initial impression of the current state of the economy is known as the recognition lag . The time required for policymakers to put a policy into action once approved is known as the implementation lag . The time to decide on the appropriate policy for the current economic situation is known as the legislative lag . The time it takes for a policy to have an effect on the economy is known as the effectiveness lag .
What do the legislative and implementation lags have in common?
They are both more important for fiscal than monetary policy
Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
The self-correcting mechanism stops working because the falling inflation produced by a negative output gap produces higher rather than lower real interest rates when the policy rate hits the zero lower bound, and this increase depresses planned spending and further widens the output gap.
Which of the following statements is correct?
Through autonomous monetary policy adjustments the Federal Reserve can target any inflation rate in the long run
How does a tightening or easing of monetary policy by the Fed affect the aggregate demand curve?
Tightening of monetary policy shifts the aggregate demand curve to the left, while easing of monetary policy shifts the aggregate demand curve to the right.
How is consumption related to each of these variables?
Upper C equals Upper C overbar plus mpc left parenthesis Upper Y minus Upper T right parenthesis minus cr, where Upper C overbar is the autonomous consumption expenditure, Y is aggregate output, T is taxes, mpc is the marginal propensity to consume, r is the real interest rate, and c is a parameter that reflects how responsive consumption expenditure is to the real interest rate.
What is the Fisher effect?
When expected inflation rises, nominal interest rates will rise.
In the Romer model, how does an increase in the fraction of the population engaged in R&D, alpha, affect the growth rate of per-capita output over time?
When more resources are devoted to research and development, the level of per-capita output at first falls, but the growth rate of per-capita output will rise permanently.
How does the Fed use these to increase or decrease the money supply?
When the Fed purchases government securities, the money supply increases. When the Fed sells government securities, the money supply decreases.
How and why do changes in the real interest rate affect planned investment spending?
When the real interest rate is very low , the cost of funds is very low and the return on many of the firm's planned investments will exceed it. As the real interest rate rises, the return on fewer and fewer planned investments will exceed the cost of funds. Thus, planned investment spending falls as the real interest rate rises
How and why do changes in the real interest rate affect net exports?
When the real interest rate increases, the expected return on domestic assets rises relative to foreign assets. The domestic export becomes more expensive for foreigners and imported goods cheaper for domestic purchasers. The resulting decrease in exports and increase in imports will cause net exports to decline when the real interest rate rises.
The top portion of the following table lists several supply shocks along with several exogenous events that do not affect the position of the aggregate supply curve. A response box is attached to each event
X,N,P,X,P,N,P,X,N
The top portion of the following table lists a variety of factors that shift some component of the aggregate demand and supply model. A response box is attached to each factor. The table's bottom portion contains a labeling key. Label any factor that shifts the short-run aggregate supply curve with an S. Use an X to label any factor that does not shift the short-run aggregate supply curve. (Note: Each label is used multiple times.)
X,S,S,X,S,X
Let alpha = 0.3. How is the productivity variable measured?
Y/K0.3L0.7
The "Great Moderation" is perhaps best noted for
a heightened degree of stability in most macroeconomic variables.
The information below describes the inflation and unemployment rates for Canada between 1960 and 1969. Numbers have been rounded to the nearest 0.25 of a percentage point and plotted on the graph to the right.The graph shows evidence of
a negative relationship between inflation and unemployment, as the Phillips curve predicts.
A negative shock in aggregate demand will likely result in
a permanently lower equilibrium inflation rate, unless the central bank responds by lowering interest rates
Which of the following statements is correct?
all of the above - Ultimately, autonomous monetary policy adjustments by the Federal Reserve cannot determine long run aggregate output - Through autonomous monetary policy adjustments the Federal Reserve can target any inflation rate in the long run - Ultimately, autonomous monetary policy adjustments by the Federal Reserve cannot determine the equilibrium real interest rate in the long run
When a temporary negative supply shock hits the economy, then in the short-run
all of the above - if the central bank focuses on stabilizing inflation, it cannot stabilize output - the divine coincidence does not hold - if the central bank focuses on stabilizing output, it cannot stabilize inflation
What is the equilibrium real interest rate?
all of the above - it is the real interest rate that keeps the quantity of aggregate output demanded equal to potential output. - it is the real interest rate that keeps the unemployment gap equal to zero - it is the real interest rate that keeps the output gap equal to zero.
The IS curve
all of the above - shows the relationship between aggregate output and the real interest rate when the goods market is in equilibrium - tells us that a decrease in taxes or in financial frictions leads to an increase in output for any given real interest rate - tells us that increases in autonomous consumption, investment, government purchases, or net exports raise output for any real interest rate
Factors that shift the AD Curve include
all of the above - taxes, government purchases, autonomous investment
Which of the following is a correct representation of national saving?
all of the above - Y-C-G - NX+I -Sg+Sp
The shifts in the short-run aggregate supply curve continue until
all of the above are correct - the AS curve intersects AD1 and LRAS2 - a new long run equilibrium is attained - the output gap falls to zero
If we were to take the MP curve from the graph and shift it leftward, this would most likely illustrate
an increase in the real interest rate from autonomous monetary policy tightening.
Supply shocks that are positive are events that induce, at any given inflation rate, _________ in supply, thus shifting the AS curve __________
an increase, rightward
Oil prices declined in the summer of 2008, following months of increases since the winter of 2007. Considering only this fall in oil prices, the impact on the short-run aggregate supply was
an increase, since the fall in prices was a positive supply shock that lowered production costs.
The aggregate demand curve is Y = 15 minus 0.2pi when the inflation rate falls from 6 percent to 5 percent. Then, output increases from 13.8 to 17. The response of monetary policy to the inflation decline has been
autonomous easing
Assume that autonomous consumption is $1 comma 735 billion and disposable income is $10 comma 200 billion. Using the consumption function, calculate consumption expenditure if an increase of $1,000 in disposable income leads to an increase of $660 in consumption expenditure.
consumption expenditure is 8467 billion
The short-run aggregate supply curve slopes upward because an increase in output relative to potential output:
creates tight labor and product markets that cause inflation to rise
Suppose the world real interest rate decreases. In a small open economy, this would
decrease net capital outflows
According to modern Phillips curve analysis, an increase in the unemployment gap would:
decrease the inflation rate by moving downward and to the right along the Phillips curve.
A _________ mandate best describes the policy making environment in the United States.
dual
When macroeconomic stabilization policy gives equal priority to price stability and stabilizing overall economic activity, it is referred to as a
dual mandate
Population growth is similar to depreciation, in that
each lowers the capital-labor ratio
Both short-run and long-run equilibria require that the quantity of aggregate output demanded and the quantity supplied are
equal
Suppose the economy is starting from a situation of long-run equilibrium. In this case, we know that its equilibrium output (Upper Y star) is __________ its potential output (Upper Y Superscript Upper P).
equal to
Beyond this equality, the attainment of a long-run equilibrium also requires that actual output potential output.
equals
In the per worker production function, A, technology is considered to be
exogenous
If the inflation rate target is 2%, the current inflation rate is also 2%, and the output gap is zero, then according to the Taylor rule, the nominal federal funds rate should be ________ percent.
four
When macroeconomic stabilization policy requires stable prices as a condition of pursuing other goals, it is referred to as a
hierarchical mandate
During this period, the U.S. economy experienced
higher inflation, slower growth
When a permanent negative supply shock hits the economy
in the long-run, output is permanently lowered whether the central bank reacts or not
Which of the following describes a reason why the long-run Phillips curve relationship differs from the short-run relationship?
in the long run, expected inflation is taken into account when making work and hiring decisions.
According to modern Phillips curve analysis, a price shocklong dashlike a significant increase in oil priceslong dashwould:
increase the inflation rate by shifting the Phillips curve upward.
According to modern Phillips curve analysis, an increase in expected inflation would:
increase the inflation rate by shifting the Phillips curve upward.
Spending on education is likely to raise output per person by
increasing the productiveness of R&D
The equilibrium real interest rate
is discussed by the Federal Open Market Committee at its meetings
What basic relationship does the long-run Phillips curve describe?
it indicates unemployment will move toward its natural rate regardless of the inflation rate.
An increase in the saving rate results in a higher steady state
level of capital per worker
Autonomous easing of monetary policy involves
lowering interest rates and shifting the MP curve to the right
Business cycles are best defined as fluctuations in aggregate economic activity in which
many economic activities expand and contract together in a recurringlong dashbut not periodiclong dashfashion.
If the economy is in a long-run equilibrium when the Federal Reserve decides that its inflation target is too low and chooses to raise it,
monetary policy would ultimately lead to higher inflation but real interest rates and potential output would be unaffected in the long run
Okun's law describes the:
negative relationship between the unemployment gap and the output gap.
Shifts of the ________ curves result from autonomous monetary policy.
none of the above - MP, IS, & AD - MP & IS, but not AD - MP, but not IS nor AD - IS & AD, but not MP
Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007. Which of the following is a likely result of this increase in financial frictions?
none of the above - The AD curve likely did not shift - The AD curve likely shifted right which caused a positive inflation gap - The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate - The AD curve likely shifted left which caused a positive inflation gap
Compared to positive supply shocks, negative supply shocks have ___________ effect on aggregate supply
opposite
Adaptive expectations are based on:
past values
Whether positive or negative, supply shocks that ultimately make output and inflation different are
permanent
In the figure to the right, a long-run equilibrium exists at _________ while a short-run equilibrium occurs at ___________
point 1, point 1 and 2
In his first State of the Union speech in January 2010, President Obama proposed a tax credit for small businesses and tax incentives for all businesses that invest in new plant and equipment. The anticipated effect of these proposals on aggregate demand is
positive, increasing AD at any given inflation rate
Of the factors identified above that shift the short-run aggregate supply curve, the only factor that possibly also shifts the long-run aggregate supply curve is __________ but only if this factor is
price shocks, permanent
A leading countercyclical variable
reaches a trough before the peak of the business cycle
The divine coincidence
refers to policies that accomplish both goals of stabilization policy.
In the preceding table, the permanent supply shocks are associated with
regulations and technology
The "Great Moderation" period has been assigned to the time period
running from 1984-2007
Supply shocks are exogenous events that cause ________ the aggregate supply curve.
shifts in
The AD Curve
shows how changes in equilibrium output affect the inflation rate
In the per worker production function, which of the following does not determine the level of output per worker?
taxes
Milton Friedman and Edmund Phelps contributed which insight(s) to Phillips curve analysis?
that, in the long run, the level of unemployment is independent of inflation
What would be the effect on the aggregate demand curve?
the AD curve will shift to the right.
If the economy is at point 1 in Figure 13.1 and there is no policy intervention, what happens next?
the AS curve shifts down, causing both output and inflation to decline
If the Federal Reserve raises interest rates in an autonomous tightening
the MP curve shifts up, there is an upward movement along the IS curve, and the AD curve shifts to the left to a lower level of equilibrium output
Combining Okun's law with the Phillips curve helps derive the short-run aggregate supply curve in that:
the Phillips curve describes the short-run negative relationship between the unemployment rate and the inflation rate, while the short-run aggregate supply curve describes the positive relationship between output and inflation.
Variables are classified as leading, lagging, or coincident depending on where their turning points are relative to the turning points of
the business cycle
The time it takes for policymakers to obtain and to understand the data and to change the policy instrument based on that information is known as ________, respectively.
the data, recognition, and implementation lags
The aggregate demand curve slopes downward because a rise in inflation leads:
the monetary policy authorities to raise real interest rates.
What is the real interest rate?
the nominal interest rate minus expected inflation.
Assume that an economy is in equilibrium when technological progress causes an increase in total factor productivity. Once the economy has adjusted to its new equilibrium, and assuming that the supplies of capital and labor remain unchanged, which of the following has increased?
the real wage
When a permanent negative supply shock hits the economy
there is no permanent effect on inflation if the central bank raises interest rates
The figure to the right displays hypothetical cyclical fluctuations in aggregate economic activity. The highlighted points in time (i.e., t1 through t5) represent the cyclical
turning points
If the oil price decline is viewed as a temporary shock, the anticipated impact on the long-run aggregate supply is
unchanged
Strong evidence of convergence exists for
wealthy nations that belong to the Organization for Economic Cooperation and Development.
The idea behind the Phillips curve is that
when the unemployment rate is low wages will increase
Suppose Japan has a GDP of $2 trillion, and that its national saving rate is 16%.
Japan's national saving is $ 320 billion. If private saving is $224 billion, Japan's government saving is $ 96 billion.
