EC111Class11Answers

EC111Class11Answers - EC111 MACROECONOMICS Spring Term 2012...

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EC111 MACROECONOMICS Spring Term 2012 EC111 Class 11 Solution Question 1 a. Long-term growth is normally defined as sustained increase (over a series of years) in real per capita national income, y (typically measured as GDP). Annual growth is measured as (y t – y t-1 )/y t-1 . Over the long run, small differences in the average growth rate can lead to large differences in the level of real GDP. This reflects the outward shift of the PPF due to capital accumulation and improved technology. Increases in GDP per capita are closely related to the overall increase in living standards. Hence it is an important policy target. b. Economic instability is the year-to year fluctuations in real national income around the long run trend. This is often called the output gap. Economic instability creates uncertainty that may influence economic decisions such as investment. If people are risk averse they will prefer income to grow along a steady path; the same applies to policy makers. Note that if investment is lower as a result of uncertainty, this may slow down capital accumulation and harm long run growth.
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This note was uploaded on 03/15/2012 for the course EC 111 taught by Professor Timhatton during the Spring '12 term at Uni. Essex.

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EC111Class11Answers - EC111 MACROECONOMICS Spring Term 2012...

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