8.

1 Economic Growth Rates

1. To gauge living standards across countries with populations of different sizes, economists use Real GDP per capita. 2. In poor countries, the relative prices for non-traded goods (such as household services) to traded goods (such as jewelry) are _______________ than in rich countries. Cheaper 3. Economists who have studied economic growth find only weak evidence for convergence. ___________. True 4. At a 7 percent annual growth rate in GDP per capita, it will take_____ years for GDP per capita to double. ( round to nearest decimal) Divide the number 70 by the annual growth rate. 10.0 Similar Exercise At 5 percent annual growth rate in GDP per capita, it will take ____ years for GDP per capita to double. 14.0 At 2 percent annual growth rate in GDP per capita, it will take _____ years for GDP per capita to double. 35.0 5. Future Generations. Some economists say that economic growth involves a trade-off between current generations and future generations. If a current raises its saving rate, what does it sacrifice? Current Consumption What will be gained for future generations? Both a and b which is more output and more capital 6. Will the Poorer Country Catch Up? Suppose one country has a GDP that is one-eighth the GDP of its richer neighbor. But the poorer country grows at 10 percent per year, while the richer country grows at 2 percent per year. In 35 years, the _________ country will have a higher GDP (hint use the rule of 70) Poorer 7. If a countrys GDP grows at 2 percent per year, it will take____ years for GDP to increase by a factor of four. (enter a numeric response using a real number rounded to one decimal) Using the rule of 70, if a countrys GDP grows 2 percent over year, then GDP will double every 35 years (from 70/2=35). Thus, the countrys GDP will quadruple (double twice) every 70 years. 70 Similar Exercise If a countrys GDP grows at 5 percent per year, it will take _____ years for GDP to increase by a factor of four.

28 8. Growth in Per Capita GDP. The growth rate of real GDP per capita equals the growth rate of real GDP minus the growth rate of the population. If the growth rate of the population is 1 percent per year, how fast must real GDP grow for real GDP per capita to double in 10 years? ______ percent. 8 Similar Exercise Growth per capita GDP. The growth rate of real GDP per capita equals the growth rate of real GDP minus the growth rate of the population. If the growth rate of the population is 1 percent per year , how fast must real GDP grow for real GDP per capita to double in 14 years? _______ percent. 6 2 percent a year and in 10 years? ______ Percent 9 9. Related to application 1 Increase Growth Leads to Less Child Labor in Developing Countries Economic Growth and Child Labor. Why do you think child labor tends to disappear as incomes in developing countries rise? Farmer can rely less on children and more on fertilizer and new machinery. 10.Related to Application 2 Does economic growth automatically lead to increased inequality and why? Both A&B Both Nos

8.2 Capital Deepening

1. In an economy with no government sector or foreign sector, saving must equal investment because All of the above 2. If everything else is held equal, an increase in the size of the population will _____ total output. And _________ per capita output. Increase & decrease 3. If the private sector saves 20 percent of its income and the government raises taxes by $200 to finance public investments, total investment private and public investment will increase by $___ 160 Similar Exercise 5 percent by $100 $________ 95 20 percent by $300 $_______ 240 10 percent by $200 $_______ 180 5 percent by $300 $_______

285 4. If a country runs a trade deficit to finance increased current consumption, it will have to reduce consumption in the future to pay back its borrowings. _______ True Similar Exercise If a country runs a trade deficit to finance increased current consumption, it will have to increase consumption in the future to pay back its borrowings.______ False 5. Which of the following will promote economic growth through capital deepening? Increased imports to purchase supercomputers for industry. 6. Even with a high saving rate, there is a natural limit to capital deepening. Why is there a limit? Gross investment increases at a decreasing rate but capital depreciates at a constant rate. 7. Government Spending, Taxes, and Investment. Suppose a government places a 10 percent tax on incomes and spends 40 percent of the money from taxes on investment and the rest on public consumption goods, such as military parades. Individuals save 10 percent of their income and consume the rest. In this case, total investment (public and private)_________ Increases 8. Trade Deficits and Capital Deepening. The United States ran large trade deficits during the 1980s and 1990s. How would you determine whether these trade deficits led to increased or decreased capital deepening? Identify whether the trade deficits were used to import investment goods or consumer goods.

8.3 The Key Role of Technological Progress

1. Robert Solow added ___________ to the conventional production function to account for technological change. Technological progress 2. Once we account for changes in labor force, ___________ is the next biggest source of the growth of GDP in the United States. Technological progress 3. Hong Kong relied more on capital deepening than Singapore for economic growth. False 4. According to growth accounting studies, which of the following is a possible reason for the productivity slowdown starting in 1973? A slowdown in technological progress 5. Measuring Technological Progress in the Health-Care Industry. Describe how you would measure technological progress in the health-

care sector of the economy. Use growth accounting to identify changes in health-care output not due to changes in labor and capital. How would you account for changes in the quality of health care over time in your analysis? All of the above 6. Related to Application 3 Why were some Singapore economists concerned when they learned that a very large fraction of their economic growth was accounted for by capital deepening and not technological progress? There are natural limits to growth through capital deepening. 7. Related to Application 4 If increasing energy prices caused the world wide productivity slowdown beginning in the 1070s, why did increases in energy prices in the first decade of early 2000 apparently not cause a similar slowdown? The economy has become more service-oriented. 8. Related to Application 4 Growth Accounting and Information Technology Information Technology Spillovers and Economic Growth. Why would it matter if productivity gains associated with information technology spill over into other sectors of the economy besides information technology itself? Productivity gains will be larger if information technology affects multiple sectors. Which of the following are examples of changes in information technology improving productivity in other sectors of the economy? Both A&B meaning the computers and the internet 9. Health Insurance, Wages, and Compensation. In recent years, total compensation of employees including benefits has grown, but wages, not including benefits, have not. Explain why this may have occurred, taking into account that many employers provide health insurance to their employees and health-care costs have grown more rapidly than GDP. Real hourly earnings can only increase it output per worker increases more than compensation in benefits. Is health insurance free to employees? No. Holding total compensation constant, if benefits such as health insurance increase, then wages must decrease.

8.4 What causes Technological Progress?

1. Who invented the theory of creative destruction? Joseph Schumpeter 2. Investment in human capital includes the purchases of computers used by professors. False 3. Which of the following may influence technological progress?

All of the above 4. A worldwide patent and copyright system would _________ the incentive to innovative. Increase 5. Cutting the Length of Patents. Suppose that a group of consumer activists claims that drug companies earn excessive profits because of the patents they have on drugs. The activists advocate cutting the length of time that a drug company can hold a patent to five years. They argue that this will lead to lower prices for drugs because competitors will enter the market after the five-year period. Do you see any drawbacks to this proposal? It will reduce the incentive for drug companies to invent new drugs. 6. Expansion of Free Trade and Technological Innovation. Explain why the expansion of markets from free trade can lead to increased technological innovation. Profit from technological innovation increases with free trade because markets become larger. 7. How do We Measure Technological Progress? If we cannot measure every invention or new idea, how can we possibly measure the contribution to growth of technological progress? We can measure the effects of technological progress indirectly using growth accounting methods. 8. Related to Application 5 A Virtuous Cycle: GDP and Health Height and Weight during Rapid Industrialization. Economic historians have found that the average height of individuals in both the United States and the United Kingdom fell during the mid-nineteenth century before rising again. This was a period of rapid industrialization as well as migration into urban areas. What factors do you think might account for this fall in height? All of the above How would you evaluate economic welfare during this period? Economic welfare decreased as measured by average height. 9. Human Capital Theory and the Age of Law Students. Most law students tend to be in their twenties and thirties, rather than in their forties. Explain the phenomenon, using the idea of investment in human capital. Both A&B opportunity costs and higher wages

8.5 A Key Governmental Role

1. Clear property rights reduce growth in an economy because producers are not abel to freely use innovations. False 2. Which of the following methods has the World Bank NOT tried to assist developing countries? Promotion of population growth

3. The return from education in developing countries is often lower than in developed countries. True Similar Exercise The return from education in developing countries is often higher than in developed countries. False 4. New growth theory suggests that investment in comprehensive education in a developing country will lead to permanent increases in the rate of technological progress. True Similar Exercise New growth theory suggests that investment in comprehensive education in a developing country will lead to a permanent decreases in the rate of technological progress. False 5. Using the website for the Word Ban and other sourses, describe the prospects and barriers for economic growth in Africa. All of the above 6. The Brain Drain and Incentives for Education. Some economists are concerned about the brain drain the phenomenon in which highly educated workers leave developing countries to work in developed countries. Other economists have argued that brain drain could create incentives for others in the country to secure increased education and many of the newly educated might not emigrate. Explain why the brain drain could lead to increased education among the remaining residents. When highly educated workers leave more high paying jobs become available. How would you test this theory? All of the above 7. Related to Application 7 Lack of property Rights Hinders Growth In Peru Secure Property Rights and Work outside the home. With secure land titles, parents can work outside the home and earn higher incomes. Explain why this might reduce child labor. All of the above Chp. 9 Arthur okun distinguished between (auction) prices, which changed rapidly, and (custom) prices, which were slow to change. For most firms, the biggest cost of doing business is (wages) In the short run, when prices are slow to adjust to changes in demand

and supply, (demand) determines production. The wages of which of the following groups will not adjust quickly? Union workers The Internet has enabled consumers to search for the lowest prices of various goods.. of the internet? Tailored suites, Legal services, medical services Which of the following does not support the hypothesis of stickey prices? Price of fresh catach of the day. Retail Price Stickiness in Catalogs. Economist Anil Kashyap of the University of Chicagoare considerably (sticky), but during periods of (high inflation), pricesbecause of (increases in the cost of production) Which of the following is not a component of aggregate demand? Business taxes During the great depression, prices in the United States fell by 33 percent. Ceteris paribus, ..demand increased? The multiplier affect, the tax effect In the diagram to the right, the economy is currently at point A In 2001 President George W. Bush and Congress lowered taxes.by? a shift of the aggregate demand curve from AD1 to AD2(point A to C) If the MPC is 0.50, the simple multiplier will be equal to (2.0) Because of other economic factors, such as taxes, the multiplier in the United States is (smaller than) 2.50. Which of the following factors does not shift the aggregate demand curve? A decrease in price level Her marginal propensity to consume is egual to (0.80) or MPC is C/Y If the marginal propensity to consume increases, the value of the multiple (increases) 0ptimistic Firms and Aggregate Demand. The aggregate demand curve to the left if? Firms suddenly become more pessimistic about the future the long-run aggregate supply curve is (vertical) The short-run aggregate supply curve is relatively flat because in the

short run, prices are? sticky i.e., they adjust slowly In the long run, If aggregate demand increases, ( the price level will increase and output or real GDP will remain unchanged. Related to application 2 Suppose that households become nervous about the future and decide to increase their saving and decrease their consumption spending. This causes: (The aggregate demand to curve to shift to the left, the price level and output both fall in the short-run) Related to Application 3 Understanding stagflation. A stagflation refers to a situation when ( prices are increasing and output is falling) The effect of the Japanese recession in the United States. The Japanese due to that recession, (in the US aggregate demand decreased, the aggregate demand curve shifted to the left, and both the price level and real output fell in the short run) If a recession is caused by a tax increase, all except on of following statements become true. Which is not true? The aggregate supply curve shifts to the left in the short-run. Suppose the supply of money increases, causing output to exceed full employment. As a result, ( in the short run, both prices and real output will increase and in the long run, prices will increase further, but real output will fall to the full employment level) In a recession, real GDP falls short of potential GDP. This implies that (Unemployment is rising, driving wages down. This results in a rightward shift of the short-run aggregate supply curve) A negative supply shock temporarily (lowers) output (below) full employment and (raises) prices After the negative supply shock, real GDP is (lower than) potential GDP This implies that unemployment is (rising), driving wages (down). This results in a (rightward or downward) shift of the . *If its positive then all answers are opposite What happens when aggreageate demand falls? Suppose the economy is operating at full employment and aggregate demand falls causing the price level to decline and real GDP to fall below the potential GDP. As a result Wages fall, short-run aggregate supply curve shifts down and over time

the economy returns to full employment but with a lower price level When government purchases decrease, aggregate demand (decreases), and through the (multiplier) effect, real GDP (decreases) When Government purchases increase, aggregate demand (increases), and through the (multiplier) effect, real GDP (increases) When Government purchases increase, aggregate demand (increases), and through the (multiplier) effect, real GDP (increases) Exports and Real GDP. When exports increase, aggregate demand (increases) and consequently, real GDP (increases) because of the (multiplier) effect. Export and Real GDP. When exports decrease, aggregate demand (decreases) and consequently, real GDP (decreases) because of the (multiplier) effect. a. a. CH10 i. i. 1. 2. 10.1 1. To decrease aggregate demand, a govt can either decrease spending or increase taxes 2. An expansionary fiscal policy shifts the aggregate demand curve to the right, raises prices, and increases real GDP. 3. A contractionary fiscal policy shifts the aggregate demand curve to the . 4. If the multiplier for government spending is 1.10 and government spending is increased by $130 billion, calculate the amount by which the demand curve will ultimately shift. a. b. 5. a. b. Shift of the demand curve =$132 billion. Government Spending Multiplier =^Y/^G

3. 4.

5. The time taken by policy makers to recognize an economic problem and take appropriate actions is known as inside lags 6. A Chinese Experiment. In 2000, the Chinese

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government mandated three one-week holidays throughout the year See Graph Moley1 7. 7. A Chinese Experiment. In 2000, the Chinese government mandated three one-week holidays throughout the year to stimulate consumer spending. The idea was that these extended vacations would induce the Chinese to spend more of their earnings while on vacation. Although consumption spending rose during the vacation period, the data fell before and after the vacation by approximately the same amount as spending rose during the vacation. As a result there was no change in aggregate demand and the overall policy of stimulating the economy through mandated vacations was not effective 8. Time-Dated Certificates as Fiscal Policies. During the 1990s in the middle of a prolonged recession in Japan, alternative plans to issue $400 in time-dated certificates, or to give each household $400 in cash. Certificates would have greater immediate impact on consumption spending since they had to be spent within a specific period of time and the higher the value of the MPC, the greater the total impact on spending and income 9. Time-Dated Certificates as Fiscal Policies. Certificates worth @400 spent one month and after, worthless. Direct cash payments $400 to each household. The cash payments program is easier to administer through a tax rebate program 10. Time-Dated Certificates as Fiscal Policies. During the 1900s. Suppose a family had large credit card debt, which it wished to to reduce. Of the two plans, the family would prefer. The cash payments program, since cash could be used to pay off some of the credit card debt 11. It is important for policy makers to take in to account the multiplier as they design fiscal policies because the value of the multiplier determines the amount by which ultimately aggregate demand changes and helps calculate the size of the change in government spending needed to bring about a given change in aggregate

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demand ii. ii. 1. 2. 3. 4. 5. 10.2 1. Fiscal year 2007 begins on October 1, 2006

2. The largest component of federal spending is entitlement spending 3. Which of the following is an entitlement program? Medicare spending 4. Which of the following is one of the primary sources of federal government revenue? The individual income tax 5. The States and Balanced Budgets. Unlike the US the federal government, virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a recession. State budgets go into deficits as tax revenues decline 6. The States and Balanced Budgets. In the US, virtually all states have requirements that they either plan for or maintain a balanced budget. If the national economy experiences a recession, states should reduce their spending and perhaps also increase their taxes to balance their budgets. 7. The States and Balanced Budgets. The accompanying figure shows the intial aggregate demand and aggregate supply curves for the US. See Graph. 8. Automatic Stabilizers and Fluctuations in Output. Because of automatic stabilizers, the states that have a more generous unemployment insurance program experience smaller fluctuations in output 9. In 2005, interest rates in the United States rose. As a result, which component of federal spending increased automatically? Net interest on newly issued debt 10. Mandatory Spending and Entitlements. Entitlements and mandatory spending constitute all spending that Congress has authorized by prior law and must be made

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by the federal government unless Congress changes the laws, iii. iii. 1. 10.3 1. Who among the following was the first president to consciously use fiscal policy to stabilize the economy? John F. Kennedy 2. Which of the following occurred in the late 1908s and 1990s that made policy makers reluctant to use fiscal policy to stabilize the economy? Huge budget deficits 3. The U.S. economy witnessed federal budget surpluses in the late 20th century under President Clinton 4. Long-run average is know as permanent income

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5. Tax Refunds and Consumer Spending. Were the 2001 Tax Cuts Spent or Saved? In 1999, the IRS began to mail out refund checks because of changes in the tax law in 1998. Assuming that taxpayers did knowthat they would receive refundsthe result refund would be an increase in consumption expenditure. 6. The Rise and Fall of Fiscal Surpluses. Which of the following factors led the US from federal surpluses at the end of the 1990s to deficits in the first decade of 2000? Tax cuts combined with increased spending 7. Fiscal Policy for Presidents Roosevelt and Kennedy. Kennedy 1960s Roosevelt Great Depression. The fiscal policy of the Roosevelt administration during the depression era can be illustrated by a shift of the aggregate supply curve from AS1 to AS2 leading to a new equilibrium at F with a higher output and lower price level 8. College Students and Tax Rebates. If the government distributes a rebate (as part of a temporary tax cut) to tax payers. A college student who receives the tax rebate is likely to use the rebate to increase current consumption, since she bases her consumption on current income, but a middle aged married man is likely to save the

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rebate, since he bases his consumption on permanent or long-term average income 9. 9. The Changing Corporate Tax. Over time in the US, the importance of corporate tax for raising federal revenue has declined 10. Long-Run Deficit Projections. The Congressional Budget Office (CBO) makes long-run budget deficit projections. Although these projections are based on restrictive and often unrealistic assumptions, the CBO makes these projections to help guide future fiscal policy

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