AP Macro: Edge Ex: Economic Growth
An increase in investment spending would cause ___________________ in the short run and then cause ______________________ in the long run.
AD to shift to the right; LRAS to shift to the right
Which of the following best describes the term "factor of production"?
Any resource used to produce a good or service. correct
What does a single point on a production possibilities curve show?
A combination of two goods that can be efficiently produced with a given amount of resources and technology.
Assuming the depreciation of capital is the same at any point, rank each of the combinations of consumption and capital goods according to which leads to the greatest economic growth.
C and D tied, B, A (Economic growth results from increases in the capital stock, so the points with the most new capital goods lead to the greatest growth even if the particular combination is not an efficient use of current resources. The first three options have point A as the point leading to the most growth but the amount of new capital goods is the smallest. The third option might have been attractive because points A and C are on the PPC and thereby efficient, but point C adds more new capital so there is no tie with respect to the impact on growth. The fourth option might also be attractive if you are considering efficient use of current resources before considering the impact on growth. The last option is correct because points C and D both add the same amount of new capital and thereby have the same impact on future productivity - but C is more efficient because the country could have had more current consumption without any less future growth.)
Lenders with money to invest are not inclined to make loans to students to pay for additional schooling because there is no collateral that can minimize the lender's loss if the student defaults on the loan.
More Human Capital
How can a country have positive gross investment that results in a decrease in its capital stock?
Depreciation was greater than gross investment. (In order for a country's capital stock to increase, there must be enough investment to first replace worn out, or depreciated, capital and then add new capital to the capital stock; there needs to be positive net investment. Positive net investment would increase the capital stock. Zero net investment would provide enough gross investment to replace depreciated capital but no more, so the capital stock would remain constant. Depreciation that is less than net investment would be positive net investment because gross investment is more than enough to replace depreciated capital. If there is no depreciation, as indicated in the last option, it is true that gross investment and net investment would be equal but that would result in an increase in capital stock.)
How is economic growth affected when financial markets do not function well?
Economic growth is slowed because less savings are redirected toward investment in new capital. correct
Expansionary fiscal policy and expansionary monetary policy both cause GDP to increase in the short run. How does each policy affect economic growth in the long run?
Expansionary fiscal policy results in higher interest rates and does not generally promote economic growth; in contrast expansionary monetary policy which lowers interest rates is likely to promote economic growth. correct
Lenders with money to invest are skeptical of making risky loans to researchers who may or may not be successful in research and development.
Improved Technology correct
A lack of oversight of banks and an increase in the number of bank failures make households distrustful of financial institutions.
Investment
Which of the following best describes the long-run aggregate supply (LRAS) curve?
It is vertical and always equal to the full-employment level of real GDP.
Heavy manufacturing firms are allowed to emit pollutants that are known to contaminate rainwater and the country's freshwater resources for household use as well as agricultural and other light manufacturing purposes.
More Natural Capital
A military conflict with a neighboring country has already resulted in factories on the border being bombed and many lives lost and there is no end in sight.
More Physical Capital More Human Capital
Suppose a country is at full employment. Would the country experience economic growth as the direct result of an increase in spending net exports? Explain
No, because LRAS does not shift. (An increase in spending on net exports, or any other category of spending, would cause AD to shift to the right. The shift in AD would cause an increase in output (with AD and SRAS crossing at a higher level of output) but it would not change potential output. Potential output does not change, and LRAS does not shift, without a change in the amount of available resources or technology. Economic growth is defined as an increase in a country's ability to produce goods and services, its potential output. Options (B), (C) and (E) would affect actual output but not potential output. Options (B) and (E) also cause actual output to decrease, which makes them even worse choices. Option (D) is not correct because LRAS would not shift without more resources or improved technology.)
Assume the government implements a tax incentive to encourage individuals to increase savings for retirement. How would the real interest rate change and how would that affect the capital stock and aggregate supply in the long run?
Real interest rates would decrease, the capital stock would increase and the LRAS would shift to the right.
In order to finance an increase in government spending on national defense, the government borrows funds from the public. As a result of the increased government borrowing, what would happen to the real interest rate, private investment spending, and the rate of economic growth?
Real interest rates would increase, investment spending would decrease and the rate of economic growth would decrease.
How would an improvement in production technology affect a country's production possibilities curve and LRAS curve?
The PPC would shift away from the origin and the LRAS would shift to the right.
How would a country's production possibilities curve (PPC) change when the country's LRAS curve shifts to the right?
The PPC would shift away from the origin.
The given diagram shows a production possibilities curve with two goods, bicycles and desks. If the combination of bicycles and desks represented by point A were being produced, what would happen when some of the machinery being used for bicycle production was moved to desk production? A on the PPC
The combination of bicycles and desks would be at a point on the PPF to the left of point A. correct
What would happen to a country if it were to choose point B instead of point A, as shown in the given graph? A is farther up the curve then B
The country would get more capital goods, which would result in an increase in production possibilities in the future than it would have had at point A.
"Give a man a fish and you feed him for a day, but teach him to fish and feed him for a lifetime." What important ideas about economic growth are expressed by this adage? What alternative policies would help feed the man for a lifetime?
The distinction between the short run and the long run is made clear. Economic growth is not about how much is produced and consumed in the short run (for a day), but it is the result of an increase in the ability to produce goods and services, an increase in productive capacity that could increase the amount produced and consumed in the long run (for a lifetime). Teaching a man to fish is providing him with human capital. Human capital is a determinant of economic growth increasing the man's ability to produce goods and services. Besides human capital, other determinants of economic growth include physical capital, natural resources and technology. Giving the man a fishing pole or net would be a form of physical capital that would increase his ability to produce. Managing the fisheries and water resources so that they can be renewed would allow for the ability to produce to be sustained in the long run. Developing technologies that improve efficiency in fishing could allow for fish to be caught in less time and that time allocated to producing other goods to consume. Alternative policies that increase physical capital, human capital, natural capital or technology would increase the man's ability to produce goods and services.
When the aggregate demand (AD) and short-run aggregate supply (SRAS) intersect to the left of the long-run aggregate supply (LRAS), which of the following is true?
The economy is experiencing a recessionary gap and some resources are not fully employed.
If the Bureau of Economic Analysis releases new data that shows real GDP increased in the last quarter, how could this data not indicate that economic growth occurred?
The economy was in recession, and the increase in GDP was the result of a recovery
What is the opportunity cost of investing resources into new capital goods?
The goods and services that could have been produced with those resources and consumed today.
On a Sunday morning talk show, a panelist states that there was economic growth despite a decrease in real GDP in the third quarter. Can this claim ever be true? Explain.
The panelist's claim could be true if the country's capital stock and productive capacity increased as the economy slipped into a recession.
The given diagram shows a production possibilities curve with two goods, bicycles and desks. If the combination of bicycles and desks represented by point A were being produced, what would happen when the amount of available labor increased? A on PPC
The production possibilities curve would shift out away from the origin
How would the rate of economic growth be affected by an increase in deficit spending to finance investments in public infrastructure?
The rate of economic growth would increase only if the public infrastructure investment more than offset the decrease in private investment due to higher interest rates.
The given diagram shows a production possibilities curve with two goods, bicycles and desks. Which of the following would be true about a move from point A to point B? A inside PPC and B on the PPC
With more efficient use of resources, there is an increase in both the number of bicycles and the number of desks produced.
In the aggregate demand and aggregate supply model, what kind of shift would indicate an increase in productive capacity?
a rightward shift of LRAS correct
What must increase in order for any type of government policy to have a positive impact on economic growth?
capital stock
The abstract model of the production possibilities curve that applies to the question of allocating resources toward growth has what goods on its axes?
consumption goods and capital goods correct
Suppose workers receive training or education that helps them develop skills that make them more productive than they were before. An economist would say there was an increase in what resource?
human capital
Which of the following measures would NOT result in economic growth?
limiting the amount of capital per worker
What two things will directly increase an economy's potential to produce goods and services?
more productive resources and better technology
What would result in a decrease in a country's capital stock?
negative net investment, but positive gross investment
