Econ HW 8- w/answers

Econ HW 8- w/answers - Dr Gropp Name Introduction to...

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Dr. Gropp Name__ __ ________________ Introduction to Economics Homework 8 1. The U.S. economy has experienced substantial growth over the last century. Discuss the factors that led to this growth by summarizing the key determinants of potential output. You do not need to list every possible factor that affects Y*, just summarize the major categories. 2. Summarize the logic of the supply-side economic policies pursued early in the Reagan administration. Do you think these policies were successful in improving the performance of the U.S. macroeconomy? Cite specific evidence from recent economic performance in the United States. 3. It is conventional wisdom that higher saving makes individuals better off in the future. Describe in macroeconomic terms how higher saving can raise the welfare of the entire society. Use a "capital market" graph that includes investment and saving curves in your answer (capital market graph = Interest Rates on the vertical axis, Savings/Investment on the horizontal axis, with a downward sloping investment curve and upward sloping savings curve). 4. When the government budget deficit rises, many economists predict that private investment will be "crowded out." Use a capital market diagram to demonstrate the crowding out phenomenon after an increase in the government budget deficit. Make sure that you clearly label the magnitude of investment crowding out.
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Dr. Gropp Name__ __ ________________ Answers: 1. Since 1900, three major factors have altered productive capacity (potential output) in the U.S. economy. First, the capital stock has increased, as a result of investment. With more capital resources, aggregate production capacity rises. Second, the population of the U.S. has grown dramatically, and the proportion of the population participating in the labor force has gone up due to demographic and preference shifts, such as more women entering the labor force. These changes have created more labor resources. You might also have mentioned that improved education has greatly increased the skill of the work force (higher "human capital") which probably created substantial growth. Third, and likely most important, there have been important improvements in technology so that the economy can produce more output, even if input resources had stayed the same.
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