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Macroeconomics: Economic Growth, Financial System, and Business Cycles

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  • What is long-run economic growth?

    Long-run economic growth is the process by which rising productivity increases the average standard of living, measured by real GDP per capita.

  • How is real GDP per capita defined?

    Real GDP per capita is the amount of production in the economy per person, adjusted for changes in the price level.

  • What factors determine labor productivity growth?

    Labor productivity growth depends on increases in capital per hour worked, technological change, and secure property rights.

  • What is the Rule of 70?

    The Rule of 70 estimates the number of years for an economic variable to double by dividing 70 by the growth rate percentage.

  • What is potential GDP?

    Potential GDP is the level of real GDP when all firms operate at capacity with normal hours and workforce size.

  • What role does the financial system play in economic growth?

    The financial system facilitates growth by channeling funds from savers to firms for investment through financial markets and intermediaries.

  • Define financial markets and financial intermediaries.

    Financial markets are where stocks and bonds are traded; financial intermediaries like banks borrow from savers and lend to borrowers.

  • What services does the financial system provide?

    It provides risk sharing, liquidity, and information to help allocate funds efficiently.

  • Explain the relationship between savings and investment in a closed economy.

    In a closed economy, total savings equals investment, where savings is income minus consumption and government spending.

  • What is the market for loanable funds?

    A conceptual market where borrowers and lenders interact to determine the real interest rate and quantity of funds loaned.

  • How does an increase in technological change affect the loanable funds market?

    It increases demand for loanable funds, raising the real interest rate and quantity of funds loaned.

  • What is crowding out in the context of government budget deficits?

    Crowding out occurs when government borrowing reduces funds available for private investment, raising interest rates and lowering investment.

  • What characterizes the business cycle?

    The business cycle consists of alternating periods of economic expansion and recession, marked by peaks and troughs in real GDP.

  • How is a recession officially defined by the National Bureau of Economic Research (NBER)?

    A recession is a significant decline in economic activity spread across the economy lasting more than a few months, visible in production, employment, income, and trade.

  • What typically happens to interest rates and wages near the end of an expansion?

    Interest rates rise and wages increase faster than prices, causing firm profits to fall.

  • How do recessions affect inflation?

    During recessions, inflation tends to fall or prices may even decline due to lower demand relative to supply.

  • Why is unemployment often still rising after a recession ends?

    Firms reduce production and lay off workers during recessions, and employment recovery lags behind economic recovery.

  • Why can't economists reliably predict recessions?

    Because business cycles are not uniform, leading indicators are unreliable, and triggering events are hard to foresee.

  • What factors contributed to the Great Moderation in the U.S. economy?

    Increased importance of services, unemployment insurance, active government stabilization policies, and a more stable financial system.

  • How does saving by households affect economic growth?

    Saving provides funds for investment, increasing productive capacity and future consumption.