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C HAPTER 23 E CONOMIC G ROWTH : T HEORY AND P OLICY 1. Long-run growth policies encourage capital formation, education and training, and the development of new technology. The objective of growth policies is to shift the production function upward and ensure that the economy sustains a high long-run growth rate. The objective of (short-run) stabilization policy is to maintain the actual GDP close to potential GDP in the short run, so that neither high unemployment nor high inflation is a problem. 2. Draw a graph similar to Figure 23-1 in the text. Higher levels of capital increase labor productivity, resulting in higher levels of output produced with the same quantity of labor. For example, in Figure 23-1 increasing the amount of capital from K 1 to K 2 increases the output from Y a to Y b . Labor productivity increases when the capital stock is larger because workers can use the available capital to produce more goods and services. For example, imagine loading and unloading a semi trailer truck by hand vs. using a forklift. One forklift operator can load and unload the truck in far less time then can be done by hand. FIGURE 23-1 3. The productivity growth for each country is shown in the fourth column below:
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1990 output per hour 2000 output per hour Productivity growth 1990-2000 Country A $40.00 $48.00 20% Country B 25.00 35.00 40% Country C 2.00 3.00 50% Country D 0.50 0.60 20% Productivity growth was highest for Country C, which had a very low initial level of productivity. Note that the productivity growth for Country D lagged far
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