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33 Cards in this Set

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Neoclassical Growth Theory

Proposition that the real GDP per person grows because technological change induces saving and investment that make capital per hour of labor grow

Loanable Funds Market

The aggregate of all the individual financial markets

New Growth Theory

holds that real GDP per person grows because of the choices people make in the pursuit of profit and that growth will persist indefinitely

Net Investment

(Gross investment) -- (Depreciation)

An increase in labor productivity

Shifts demand for labor curve rightward and the production function upward

Growth rate of real GDP per capita

(Growth Rate of Real GDP) -- (Growth Rate of the Population)

Crowding-out Effect

The tendency for a government budget deficit to raise the real interest rate and decrease investment

Households make saving decisions by considering all of the following factors

1. default risk


2. disposable income


3. wealth

Classical Growth Theory

View that the growth of real GDP per person is temporary and that when it rises above the subsistence level, a population explosion eventually brings it back down to the subsistence level

The output gap

The gap between real and potential GDP

Recessions cause the output gap to be _____.

negative

New Goods Bias

New products are introduced to the market near recalibration and are expensive

Quality Change Bias

CPI overstates inflation because part of price increase is an improvement in quality

CPI is

upwardly biased

Substitution Bias

Consumers choose cheaper substitutes;


CPI ignores the substitution

Outlet Bias

CPI ignores online and discount stores.


CPI overstates the inflation

Investment equation

Investment = Savings + (Taxes - Gov't Spending) + (Imports - Exports)




I = S + (T-G) + (M-X)

AE > GDP

Decrease in inventory


Real GDP and employment increase



AE < GDP

Increase in inventory


Real GDP and employment decrease



Aggregate Expenditure Equation

Y = C + I + G + X - M

Income approach to measuring GDP sums together ________.

Compensation of employees net interest, rental income, corporate profits, and proprietors' income

To make income equal GDP you must (two things)

Add taxes less subsidies


Add depreciation

GDP is not a perfect measure of well-being because _______.

GDP is not adjusted for pollution,

The unemployment rate is supposed to _______.

measure underutilized labor

What is an example of frictional unemployment

Robin s quitting his current job to find another that has better prospects

What is an example of structural unemployment

Outsourcing resulted in many job losses in the mid 2000s.



Growth Rate of Real GDP per capita =

= (Growth rate of real GDP) - (Growth rate of population)

What 3 factors increase the demand for loanable funds?

1. Real interest rate


2. Expected profitability


3. corporate or business income taxes

What 4 factors affect the supply of loanable funds?

1. Real interest rate


2. Disposable income


3. Expected future income


4. Wealth

The components of aggregate expenditure that are influenced by GDP are _______.

Consumption expenditure and imports

When real GDP increases, the change in consumption expenditure equals ______.

The MPC x the increase in real GDP

When real GDP increases, the change in imports equals ______.

The MPI x the increase in real GDP

Real GDP increases by more than the increase in investment because ______.

Induces an increase in consumption expenditure