ch01 - CHAPTER 1 INTRODUCTION Problems 1. "A country's...

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INTRODUCTION Problems 1. "A country's rate of economic growth is determined solely by the amount of resources available to the country." Comment on this statement. Increases in the availability of resources, that is, labor and capital used in the production of goods and services account for only part of a nation's economic growth. The efficiency with which these factors of production are used also affects economic growth. Increases in the efficiency of production result from increases in the education and skill levels of the labor force and from newer and more efficient technology. In addition, the factors of production are not fully employed all the time. During an expansion or recovery, the use of the factors of production increases, which leads to an increase in production and output. 2. In the 1960s, increases in the rate of unemployment were generally associated with decreases in the inflation rate and vice versa. But in the 1970s and 1980s unemployment and inflation often moved in the same direction. How can you explain this? A shift in aggregate demand causes the unemployment rate and the inflation rate to move in opposite directions, whereas a shift in aggregate supply causes unemployment and inflation to move in the same direction. Most disturbances in the 1960s came from the demand side, while many of the disturbances in the 1970s and 1980s came from the supply side. 3. "Since the long-run AS-curve is vertical, we can conclude that the total real output of a nation cannot grow in the long run." Comment on this statement. The AD-AS framework is a static framework that assumes that the level of potential GDP is fixed. However, the potential GDP of a nation grows over time as the amount of available resources or the efficiency with which these resources are used increases. Figure 1-4 in the text clearly indicates that the long-run (vertical) AS-curve moves to the right by a small percentage each year. 4. "Long-run growth can best be studied by focussing on the reasons for business cycles." Comment on this statement. Growth theory focuses primarily on the accumulation of inputs and improvements in technology that allow for an increased standard of living over time. Since growth theory tries to explain the average growth rate of an economy over many years, it ignores the short-run fluctuations (recessions and booms) that occur over the course of business cycles. 1
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This note was uploaded on 12/18/2010 for the course SOES 2003 taught by Professor Jian during the Fall '10 term at Uni. Southampton.

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ch01 - CHAPTER 1 INTRODUCTION Problems 1. "A country's...

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