Chapter 10: Economic Growth (Lecture 4)

Front 1

What comprises the financial system?

Back 1

Financial markets and intermediaries

Front 2

Define: business cycle

Back 2

Alternating periods of economic expansion and recession

Front 3

How is long-term economic growth calculated?

Back 3

The percentage change in real GDP Per Capita

Front 4

How is growth rate of GDP calculated? How is the long-term growth rate of GDP calculated?

Back 4

[GDP(new) - GDP(old)]/GDP(old)

The average of all growth rates.

Front 5

How can the time of GDP "doubling" be calculated?

Back 5

Rule of 70: 70/growth rate = years

Front 6

What does long-term economic growth depend on? Define the term.

Back 6

Increases of labor productivity.

It is the quantity of goods and services a laborer can produce in an hour

Front 7

What determines labor productivity success?

Back 7

1. Capital quantity per hour

2. Technology

Front 8

Define: capital and capital stock

Back 8

Goods that produce other goods or services; capital stock is the total amount of physical capital in a country

Front 9

Will increasing inputs ensure long-term economic growth? Which type of input ensures this?

Back 9

No, as it requires technological changes as well; entrepreneurs

Front 10

Define: potential GDP

Back 10

The potential attainable GDP if all firms in an economy produced at capacity

Front 11

What is the role of the financial system in long-term economic growth?

Back 11

It provides a medium for businesses financing their expansions; and therefore drive economic growth

Front 12

What is the source of funds of financing for businesses?

Back 12

Household saving

Front 13

Define: financial intermediaries. Examples?

Back 13

Intermediaries which obtain funds from savers and lends to borrowers. E.g. banks, pension and mutual funds and insurance companies

Front 14

What does the real GDP per capita represent?

Back 14

The quantity of goods and services an average person in an economy can purchase

Front 15

What are the three key functions of the financial system?

Back 15

1. Diversification

2. Liquidity

3. Information Processing (investments)

Front 16

Define: investment (economics)

Back 16

When firms use funds from savers to purchase capital goods to increase production

Front 17

What are three formulas to calculate investments in an economy? What does investment equal to?

Back 17

1. I = Y - C - G

2. I = S(private) + S(public) = S

3. I = (Y + TR - C - T) + (T - G - TR)

National Saving

Front 18

Define: balanced budget, budget deficit and budget surplus

Back 18

Balanced Budget: when Taxes equal government spending and transfer payments

Budget Deficit: Government Spending and Transfer payments are larger than taxes

Budget Surplus: Taxes are greater than government spending

Front 19

How can public saving become negative? How can the government finance this?

Back 19

When there is a budget deficit; through issuing treasury bonds

Front 20

Define: market for loanable funds

Back 20

The interaction between borrowers and lenders that determine the market interest rate and the quantity of loanable funds exchanged

Front 21

What is another term for budget deficit?

Back 21

Dissaving

Front 22

Define: crowding out

Back 22

A decrease in investment as a result of increasing government spending

Front 23

What is the relationship between the business cycle and inflation rates? Why is this?

Back 23

Inflation rates increase during expansions and decrease during recessions

Businesses find it easier to increase prices if consumption is high during expansions and vice versa.

Front 24

Statistically, what typically occurs on unemployment immediately after recessions? Why is this?

Back 24

Unemployment rises because:

1. Employment may not grow as fast as labor force growth from population growth. This causes the employment rate to decrease; and therefore the unemployment rate to increase.

2. Firms operate under capacity

Front 25

Define: technological improvement

Back 25

Improvements in capital, or methods to combine inputs into outputs, which increases labor productivity

Front 26

With regards to unemployment, when does GDP equal potential GDP?

Back 26

When unemployment equals natural rate of unemployment.

Front 27

When GDP is less than Potential GDP, what does it imply regarding unemployment?

Back 27

Unemployment is higher than the natural rate of unemployment

Front 28

Formula: national saving

Back 28

S = Y - C - G

Front 29

If government spending increases by X, how much will investment decrease? Why is this so?

Back 29

< X. As increase in interest rate implies higher private saving; offsetting the drop.

Front 30

In the equilibrium in the market for loanable funds, is the interest rate nominal or real? Why?

Back 30

Real because both borrowers and lenders already take the expected inflation into account.

Front 31

If Real GDP is increasing slower than population growth, what will happen to the standard of living? Why is this?

Back 31

Decrease. Standard of living is computed as real GDP per capita. Therefore, if population growth is increasing faster than GDP, then the ratio has to fall.

Front 32

During recessions, how does consumption change regarding durable and non-durable goods?

Back 32

Non-durable goods don't change, but durable goods will decrease.

Front 33

Can transfer payments be negative? How is this done?

Back 33

Yes, if the unemployment benefits are taxed instead.