ECON 214- Exam 3- Actual set with
Questions and correct/verified Answers
the key to economic growth - ANSWER--more capital (physical capital)
modern economic growth theory - ANSWER-solow growth model
-natural resources and human capital are important in this model but main focus is physical capital
-starts with production function: describes how changes in capital affect real output
production function - ANSWER-describes the relationship between the inputs a firm uses and the output
it creates
EX: a single McDonalds restaurant's daily output depends on the number of employees
formula for production function - ANSWER-q=f(human capital, physical capital)
Aggregate production function - ANSWER-describes the relationship among all the inputs used in the
macroeconomy and the total output of that economy, where GDP is output
GDP=Y=F(physical capital, human capital, natural resources)
depreciation - ANSWER-is a fall in the value of resources over time
-capital wears out(roads get potholes, etc.)
-erodes capital stock
marginal product - ANSWER-change in output divided by the change in input
-MPinput= change in output from a change in input x
diminishing marginal product (diminishing returns) - ANSWER-the marginal product of an input falls as
the quantity of input rises
-generally applies across all factors of production
two important implications of the solow model - ANSWER-steady state and convergence
steady state - ANSWER-the condition of a macroeconomy when there os no new net investment
-because the marginal product of capital decreases, at some point there is no reason to build (that is,
invest) more capital
net investment - ANSWER-is the investment minus depreciation.
-In order to increase the capital stock, net investments must be positive
investment - ANSWER--positive investment is needed to offset depreciation
-if investments are exactly enough to to replace depreciated items, the capital stock will not increase and
it means no net investments
in a steady state net investments... - ANSWER-equal zero
, -capital stock stays constant
convergence - ANSWER-the idea that per capita GDP levels across nations will equalize as nations
approach the steady state
technology advancement and economic growth - ANSWER-equation: Y= AxF(natural resources, human
capital, physical capital)
-without new technology, the economy eventually reaches a steady state, and growth stops
-but new technology means that output is higher for any given level pf capital, because the capital,
which embeds the new technology, is more productive
-the new technology shifts real output, and therefore income, up to new levels
-technological innovation happens occur randomly
exogenous growth - ANSWER-is growth that is independent of any factors in the economy
EX: technology and thus economic growth
endogenous growth - ANSWER-growth driven by factors inside the economy
institutions are a factor that influence... - ANSWER-economic growth
institutions - ANSWER-significant organizations, laws, and social mores in society that frame the
incentive structure within which individuals and business firms act
-they are the rules of the game and frame the environment in which production takes place
-help determine cost and benefit of production
examples of institutions - ANSWER-private property rights, competitive markets, political stability and
rule of law, international trade, the flow of funds across borders, efficient taxes, stable money and prices
GDP is - ANSWER-production
equation for aggregate production function with institutions - ANSWER-Y=AxF(natural resources, human
capital, physical capital, institutions
investment and production occur naturally if... - ANSWER-future payoffs are significant and predictable-if
the incentives for them are strong enough
if people are allowed to own private property and use it for personal gain - ANSWER-they have strong
incentive to use their resources wisely
private property rights - ANSWER-foster economic growth
institutions that foster growth - ANSWER-are institutions that create incentives for endogenous or
natural growth
institutions are key ingredient to - ANSWER-long-run growth
aggregate demand - ANSWER-the total demand for final goods and services in an economy
-the spending side of the economy
Questions and correct/verified Answers
the key to economic growth - ANSWER--more capital (physical capital)
modern economic growth theory - ANSWER-solow growth model
-natural resources and human capital are important in this model but main focus is physical capital
-starts with production function: describes how changes in capital affect real output
production function - ANSWER-describes the relationship between the inputs a firm uses and the output
it creates
EX: a single McDonalds restaurant's daily output depends on the number of employees
formula for production function - ANSWER-q=f(human capital, physical capital)
Aggregate production function - ANSWER-describes the relationship among all the inputs used in the
macroeconomy and the total output of that economy, where GDP is output
GDP=Y=F(physical capital, human capital, natural resources)
depreciation - ANSWER-is a fall in the value of resources over time
-capital wears out(roads get potholes, etc.)
-erodes capital stock
marginal product - ANSWER-change in output divided by the change in input
-MPinput= change in output from a change in input x
diminishing marginal product (diminishing returns) - ANSWER-the marginal product of an input falls as
the quantity of input rises
-generally applies across all factors of production
two important implications of the solow model - ANSWER-steady state and convergence
steady state - ANSWER-the condition of a macroeconomy when there os no new net investment
-because the marginal product of capital decreases, at some point there is no reason to build (that is,
invest) more capital
net investment - ANSWER-is the investment minus depreciation.
-In order to increase the capital stock, net investments must be positive
investment - ANSWER--positive investment is needed to offset depreciation
-if investments are exactly enough to to replace depreciated items, the capital stock will not increase and
it means no net investments
in a steady state net investments... - ANSWER-equal zero
, -capital stock stays constant
convergence - ANSWER-the idea that per capita GDP levels across nations will equalize as nations
approach the steady state
technology advancement and economic growth - ANSWER-equation: Y= AxF(natural resources, human
capital, physical capital)
-without new technology, the economy eventually reaches a steady state, and growth stops
-but new technology means that output is higher for any given level pf capital, because the capital,
which embeds the new technology, is more productive
-the new technology shifts real output, and therefore income, up to new levels
-technological innovation happens occur randomly
exogenous growth - ANSWER-is growth that is independent of any factors in the economy
EX: technology and thus economic growth
endogenous growth - ANSWER-growth driven by factors inside the economy
institutions are a factor that influence... - ANSWER-economic growth
institutions - ANSWER-significant organizations, laws, and social mores in society that frame the
incentive structure within which individuals and business firms act
-they are the rules of the game and frame the environment in which production takes place
-help determine cost and benefit of production
examples of institutions - ANSWER-private property rights, competitive markets, political stability and
rule of law, international trade, the flow of funds across borders, efficient taxes, stable money and prices
GDP is - ANSWER-production
equation for aggregate production function with institutions - ANSWER-Y=AxF(natural resources, human
capital, physical capital, institutions
investment and production occur naturally if... - ANSWER-future payoffs are significant and predictable-if
the incentives for them are strong enough
if people are allowed to own private property and use it for personal gain - ANSWER-they have strong
incentive to use their resources wisely
private property rights - ANSWER-foster economic growth
institutions that foster growth - ANSWER-are institutions that create incentives for endogenous or
natural growth
institutions are key ingredient to - ANSWER-long-run growth
aggregate demand - ANSWER-the total demand for final goods and services in an economy
-the spending side of the economy
