Q10. Positive technological change is shown in the above diagram by the movement from:

Background

Topic: Economic Growth and Production Functions

This question tests your understanding of how technological improvements affect the per-worker production function and real GDP per hour worked.

Key Terms and Formulas

• Production Function: Shows the relationship between capital per hour worked (K/L) and real GDP per hour worked (Y/L).

• Technological Change: Refers to improvements in technology that shift the production function upward, allowing more output for the same input.

Step-by-Step Guidance

1. Examine the graph: It shows three production functions (1, 2, 3) and points A, B, C, D, E representing different combinations of capital per hour worked and real GDP per hour worked.

2. Recall that positive technological change shifts the production function upward, meaning for the same capital per hour worked, output per hour worked increases.

3. Identify which movement on the graph represents an upward shift to a higher production function, holding capital per hour worked constant.

4. Compare the points: Look for a movement from a lower curve to a higher curve at the same K/L value.

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Q22. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate discretionary fiscal policy?

Background

Topic: Aggregate Supply and Demand, Fiscal Policy

This question tests your ability to interpret shifts in the AS-AD model and recommend fiscal policy actions based on the economy's position relative to potential GDP.

Key Terms and Formulas

• Discretionary Fiscal Policy: Government actions (like changing spending or taxes) to influence economic activity.

• Aggregate Demand (AD): Total demand for goods and services in the economy.

• Aggregate Supply (AS): Total supply of goods and services.

• Potential GDP: The level of GDP when the economy is at full employment.

Step-by-Step Guidance

1. Analyze the graph: The economy moves from point A to point B, which shows an increase in real GDP and price level.

2. Determine whether the economy is above or below potential GDP at point B. If above, inflationary pressures may exist; if below, recessionary pressures may exist.

3. Recall that appropriate discretionary fiscal policy depends on whether the economy needs to be stimulated or cooled down.

4. Consider the options: Increasing government spending or decreasing taxes stimulates the economy; increasing taxes or decreasing spending cools it down.

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