Chapter 10- Economic Growth, the Financial System, and Business Cycles

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Business Cycle

Alternating periods of economic expansion and economic recession.

Expansion

During the __________ phase of the business cycle, production, employment, and income increase.

Recession

During the __________ phase of the business cycle, production, employment, and income decrease.

D. All of The Above

Which of the following contribute(s) to shorter recessions, longer expansions, and less severe fluctuations in real GDP? (Mark all that apply.) A. Monetary policy B. Unemployment insurance C. A service-based economy D. All of the above E. A and C only

Long-Run Economic Growth

The process by which rising productivity increases the average standard of living.

B. Capital, Labor Productivity, and Technology.

Long-run growth in GDP is determined by A. Labor productivity, capital, and government expenditures. B. Capital, labor productivity, and technology. C. Consumption, investment, and government expenditures. D. Technology, investment, and consumption.

D. Increases in Human Capital

Which of the following is most likely to lead to sustained long-run growth? A. Increases in the labor participation rate B. Transfer of workers from agricultural to industrial sectors C. Exploitation of natural resources D. Increases in human capital

A. Increases in Average Wages

Which of the following does NOT lead to long-run economic growth? A. Increases in average wages B. Improved labor productivity C. Technological change D. Increase in the capital stock

Labor Productivity

The quantity of goods and services that can be produced by one worker or by one hour of work.

Capital

Manufactured goods that are used to produce other goods and services.

Potential GDP

The level of real GDP attained when all firms are producing at capacity.

E. B and C only.

Potential GDP A. Measures the maximum that a firm is capable of producing. B. Increases over time as the labor force grows. C. Increases over time as technological change occurs. D. All of the above. E. B and C only.

Financial System

The system of financial markets and financial intermediaries through which firms acquire funds from households.

Financial Markets

Markets where financial securities, such as stocks and bonds, are bought and sold.

Financial Intermediaries

Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.

Excess and Borrow

Firms that act as financial intermediaries match households that have __________ funds with firms that want to __________.

Information

A key service the financial system provides to savers and lenders is to collect and communicate __________ about borrowers to savers.

Financial Investments

A key service the financial system provides to savers and lenders is to allow savers to spread their money among many __________.

Method of Exchanging

A key service the financial system provides to savers and lenders is to provide __________ a financial security for money.

GDP (Y)

The variable Y is an abbreviation for __________.

Consumption (C)

The variable C is an abbreviation for __________. A component of GDP.

Investment (I)

The variable I is an abbreviation for __________. A component of GDP.

Government Purchases (G)

The variable G is an abbreviation for __________. A component of GDP.

Net Exports (NX)

The variable NX is an abbreviation for __________. A component of GDP in an open economy.

Y = C + I + G + NX

In an open economy, there is interaction with other economies in terms of both trading goods and services and borrowing and lending money. The relationship between GDP and its components in an open economy can be written as __________.

Y = C + I + G

In a closed economy, there is no trading or borrowing and lending with other economies. Net exports are zero. The relationship between GDP and its components can be written as __________.

I = Y – C – G

When the equation showing the relationship between GDP and its components is rearranged, an expression for total investment in terms of the other variables can be written as __________.

Private Saving (SvPrivate)

The variable SvPrivate is an abbreviation for __________.

Household Income (Y)

The variable Y is an abbreviation for __________. A component of private saving.

Transfer Payments (TR)

The variable TR is an abbreviation for __________. A component of private saving.

Goods and Services (C)

The variable C is an abbreviation for __________. A component of private saving.

Taxes (T)

The variable T is an abbreviation for __________. A component of private saving.

SvPrivate = Y + TR – C – T

The relationship between private saving and its components can be written as __________.

Public Saving (SvPublic)

The variable SvPublic is an abbreviation for __________. It equals the amount of tax revenue the government retains after paying for government purchases and making transfer payments to households.

SvPublic = T – G – TR

The relationship between public saving and its components can be written as:

Total Saving (S)

The variable S is an abbreviation for __________. It is equal to the sum of private saving and public saving.

S = SvPrivate + SvPublic

The relationship between total saving and its components can be written as __________ or: S = (Y + TR – C – T) + (T – G – TR), or: S = Y – C – G

It can be concluded that total saving must equal total investment. This relationship can be written as __________.

$2 trillion and $1 trillion

In a closed economy, the values for GDP, consumption spending, investment spending, transfer payments, and taxes are as follows: Y = $12 trillion C = $9 trillion I = $3 trillion TR = $2 trillion T = $3 trillion Using the information above, private savings equals __________ and public savings equals __________.

Market for Loanable Funds

The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.

B. Technological Change

Which of the following is most likely to lead to sustained long-term growth? A. Increases in the labor production rate B. Technological change C. Exploitation of natural resources D. Transfer of workers from agricultural to industrial sectors

A, C, D, and E

Technological progress is affected by (check all that apply). A. Private property rights B. Population growth C. Entrepreneurship D. New software developments E. Investment in capital

Crowding Out

The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.

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