EC140 Chapter Notes - Chapter 26: Real Interest Rate, Diminishing Returns, Shortage

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17 Apr 2016

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Economic growth: sustained, long-term increases in the level of real gdp. Three important variables to consider: real gdp, real per capita gdp, and real gdp per worker (aspect of productivity) Rule of 72: for any variable that grows annually at x percent, that variable will double in approximately 72/x years. Family income increases over the years and allows for more consumption of luxury goods and not just necessities. Wealthier countries have the resources and the means to address environmental concerns. While average per capita incomes have been rising, there has also been a rise in income inequality. Economic growth, which promises more goods and services tomorrow, is achieved by consuming fewer goods today. This sacriice of current consumption is an important cost of growth. The process of economic growth renders some machines obsolete and also leaves the skills of some workers obsolete.

Related Questions

Question 3

According to Joseph Schumpeter, the theory of creative destruction describes a process by which

	A	some new products unleash a gale of destruction that drive other new products out of the market.
B		new products unleash a gale of destruction that drives old products out of the market.
C		new products are created by the destruction of capital.
D		the creation of new products never involves the destruction of old products.

Question 4

Which of the following countries had the highest GDP per capita in 2012?

		A Qatar
B		United States
C		Japan
D		Norway

Question 5

________ save a ________ of their income. This ________ capital in their economy and raises economic growth.

	A	Developing countries; large proportion; decreases
B		Developing countries; small proportion; increases
C		High-income countries; large proportion; increases
D		High-income countries; small proportion; increases

Question 6

The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.

A		government
B		households
C		banks
D		firms

Question 7

The U.S. economy has been more stable since 1950.

True

False

Question 8

When the economy reaches a trough in a business cycle, which of the following will occur?

A		Income, production, and employment will continue to fall.
B		Income, production, and employment will begin to rise.
C		Income and production will rise, but employment will continue to fall.
D		Employment rises, but income and production will continue to fall.

Question 9

In a closed economy, what is the relationship between saving and investment?

A		Saving is greater than investment.
B		Investment is greater than saving.
C		Investment is equal to saving.
D		Investment may be greater or smaller than saving.

Question 10

The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.

A		labor; real GDP; technology
B		capital; real GDP; technology
C		labor; capital; real GDP
D		capital; labor; real GDP

Question 11

New growth theory states that increases in ________ capital will result in ________ at the ________ level.

	A	knowledge; increasing returns to scale; firm
	B	physical; decreasing returns to scale; firm
	C	knowledge; decreasing returns to scale; economy
D		knowledge; increasing returns to scale; economy

Question 12

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

A		The British government was committed to upholding private property rights.
B		The British government was able to eliminate arbitrary increases in taxes.
C		The British government was able to more easily seize wealth.
D		Institutional changes by the British government helped protect wealth.

Question 13

Growth in real GDP per capita for the world economy was greatest during

A		the seventeenth century.
B		the eighteenth century.
C		the nineteenth century.
D		the twentieth century.

Question 14

Which of the following is a normative statement about economic growth?

A		Economic growth is associated with higher labor productivity growth.
B		Economic growth increases GDP per capita.
C		Economic growth hurts developing countries.
D		Foreign direct investment stimulates economic growth.

Question 15

The effect of a recession on a company like Whirlpool Corporation is such that

A		sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods.
B		profits fall less sharply as compared to firms that do not produce durable goods.
C		the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D		there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods.

Question 16

For the recessions in the United States since the 1950s,

A		cyclical unemployment has been non-existent.
B		unemployment rises on average by about 1.2 percentage points 12 months after a recession begins.
C		unemployment falls on average by 2 percentage points 12 months after a recession begins.
D		unemployment rises on average about 5 percentage points 12 months after a recession begins.

Question 17

You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?

A		a reduction in sales taxes
B		an investment tax credit
C		a reduction in taxes on luxury yachts
D		All of these

Question 18

In comparison to a government that runs a balanced budget, when the government runs a budget deficit,

	A	the equilibrium interest rate will fall.
	B	business investment will fall.
	C	household savings will fall.
	D	None of these

Question 19

If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.

A		labor force participation
B		the quantity of goods or services that can be produced by one hour of work
C		the working-age population
D		nominal GDP

Question 20

Policies to promote growth by increasing saving and investment work through

A		decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
B		increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital.
C		increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
D		increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

Hello, could you please assist with this discussion question for the Economics course? Thank you.

5) Go to the internet and find an article that discusses the problems of income inequality in the U.S. economy, summarize key points, and post in the Discussions area.

http://neweconomics.org/2014/12/why-inequality-is-an-economic-problem/

Why Inequality Is An Economic Problem

Rising economic inequality was a major driver of the financial crisis. With the OECD recently debunking âtrickle-downâ economics, our new report sets out the links between inequality, the growth in scale and influence of the financial sector, and the dangers for financial stability.

A fragile recovery

A return to growth in economies such as the UK and USA has been welcomed as a sign of recovery from the 2008 financial crisis. But as GDP picks up, so too has the widening gap between rich and poor.

The crisis may be over for the wealthy but the aftermath for ordinary workers depressed wages and growing debt is only getting worse.

Most nations have mustered only negligible growth and this has failed to benefit the vast majority of those nation's populations.

In the seven years following the crash, the UK has suffered the longest sustained decline in real wages since records began.

This decline hasn't has been shared equally across the income spectrum latest annual data up to the end of 2013 shows real earnings for the top 10% increasing by 3.9% and a 2.4% fall for the remaining 90%.

Households are once again piling on risky personal debt at a rate of almost $1billion a year.

Globally, wealth grew by 8.3% last year to $263 trillion, even as living standards stagnate for the majority. Income inequality has seen a sharp return the top 1% of earners have reaped 95% of the USA's economic gains since the crash.

Inequality increases as economies are financialised

Over the past four decades, financial sectors have been extensively deregulated and have expanded enormously as a result, particularly in the UK and USA.

This deregulation produced two systemic outcomes: finance has been freed to become the motor of the economy while the pursuit of greater equality of citizens, as was the focus after the second world war, has been abandoned.

Instead, the notion that unrestrained pursuit of wealth would trickle-down from rich to the poor has been embraced in the mainstream political and economic arenas.

Financial markets, products, and firms now play a much larger role in many areas; from pensions and social insurance to homes and public infrastructure.

Privatization and the doctrine of maximizing value for shareholders have increased the amount of economic activity focused on extracting the largest possible short-term profit. These trends are referred to collectively as âfinancialisationâ.

Until now the connections between this increasing prevalence of financial activities and the steady increase in economic inequality have not been clear. But when these two trends reached a boiling point in the mid-2000s they fuelled a global collapse of financial systems.

The polarization of wealth and incomes fed asset bubbles, risky financial activity,, and necessitated vast levels of household debt â resulting in the 2008 financial crash. With little done since to address these interconnected drivers, the threat of another crisis is very real.

This diagram lays out the seven indicators of economic instability, each fuelled by rising inequality and increasing financial sector activity:

Our report describes how these indicators laid the path for the 2008 crash, and threaten to do the same again:

Increasing inequality depresses demand since consumption levels depend more on the wages of those at the lower end of the income scale than the profits of the wealthy

In the face of stagnating wages, households rely increasingly on debt to maintain their lifestyles with rising asset prices, especially in residential housing, worsening this.

Financial liberalization allows money to flood into countries with trade deficits, such as the USA and the UK, providing the funds for debt-led consumption.

Snowballing wealth at the top increases risky financial speculation.

Inequality doesn't bring growth, it brings economic instability

In recent years there has been a marked slowing of growth across the world's wealthiest economies, with none returning to the growth trends experienced before the crisis. Many have begun to speculate that this stagnation could, in fact, be a permanent development meaning that wealthy economies are fundamentally unable to create enough demand to keep growing.

The mainstream political consensus has for decades now suggested that inequality is a price worth paying for economic growth.

But new research from the Organisation for Economic Co-operation and Development (OECD) shows definitively that this inequality/growth trade-off is false adding to a growing body of research showing that inequality actually prevents economies from growing. This points to a fundamental structural flaw in the economy: if the proceeds of growth are not shared, the pie stops growing.

The pursuit of higher returns for the already wealthy within this dwindling pie cannot persist forever. With wealth refusing year on year to trickle down, debt has been used to plug the wage-consumption gap for the rest.

The signals are showing quite plainly that this pursuit of growth, via inequality, is ineffective and unsustainable.

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Annual Growth Rates of Real GDP Per Capita (in percents)
Ending Year
1929
1933	-8.2
1939	0.2
1940	0.9
1945	3.7	10.3
1950	2.4	4.1	-1.8
1955	2.4	3.6	0.4	2.7
1960	2.2	2.9	0.6	1.7	0.8
1965	2.4	3.0	1.3	2.3	2.1	3.5
1970	2.3	2.9	1.5	2.3	2.2	2.9	2.3
1975	2.3	2.7	1.5	2.2	2.0	2.4	2.0	1.6
1980	2.3	2.7	1.7	2.2	2.1	2.5	2.2	2.1	2.6
1985	2.3	2.6	1.7	2.2	2.2	2.4	2.2	2.1	2.4	2.2
1990	2.3	2.6	1.8	2.2	2.2	2.4	2.2	2.2	2.4	2.2	2.3
1995	2.2	2.5	1.7	2.1	2.1	2.3	2.1	2.0	2.1	1.9	1.8	1.3
2001	2.3	2.5	1.9	2.2	2.2	2.3	2.2	2.2	2.3	2.2	2.2	2.1	2.8
	1929	1940	1945	1950	1955	1960	1965	1970	1975	1980	1985	1990	1995
Starting Year

Source: Economic Report of the President, various years.

This table keeps changes in real GDP from being overstated by adjusting for

Select one:

a. productivity.

b. inflation.

c. standard of living.

d. population growth.

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Per Capita GDP
Luxembourg	$33,609
United States	$33,586
Switzerland	$27,126
Japan	$23,311
Iceland	$23,230

Economists use numbers such as those in the table as a measure of

Select one:

a. net exports.

b. total dollar value of all final goods and services.

c. national income.

d. standard of living.

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Per Capita GDP
Luxembourg	$33,609
United States	$33,586
Switzerland	$27,126
Japan	$23,311
Iceland	$23,230

The numbers in this table were calculated by

Select one:

a. multiplying GDP by total population.

b. dividing GDP by total population.

c. adding the dollar value of all final goods and services produced in the nation.

d. subtracting net exports from GDP.

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A key gauge of future U.S. economic activity declined 0.5% last month, as the Sept. 11 terrorist attacks in New York and Washington weakened an already troubled economy.

The Conference Board said Monday its index of leading economic indicators fell to 109.2 in September,...the largest one-month decline since January 1996.... The index indicates where the overall U.S. economy is headed in the next three to six months....

The economy had been struggling for several months before the Sept. 11 attacks. Many economists have said they believe that a recession is unavoidable with the new uncertainties raised by the disaster.

Source: âLeading Indicators Decline,â USAToday.com, October 22, 2001.

The passage discusses a business fluctuation influenced by

Select one:

a. external shock.

b. monetary factors.

c. innovation.

d. capital expenditures.

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For all the recent talk of cutting taxes, Congress rarely cuts them when the economy is growing robustly, as it is now, and unemployment is low. The worry among economists is that the extra money in peopleâs pockets may make an already strong economy too strong, finally stoking inflation after a long period of relatively stable prices.

Source: The New York Times, July 14, 1999.

The passage describes rising inflation as a possible result of

Select one:

a. a booming economy.

b. rising unemployment.

c. tax cuts.

d. a prolonged period of stable prices.

EC140 Chapter Notes - Chapter 26: Real Interest Rate, Diminishing Returns, Shortage

EC140 Full Course Notes

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