Growth in total factor productivity is best described as driven by growth in:
A)
technology.
B)
capital.
C)
labor.
Total factor productivity represents the productivity that cannot be directly accounted for by increases in either capital or labor, and is generally considered to be driven by changes in technology.
Sources of long-run economic growth most likely include increases in:
A)
labor supply, physical capital, and technology.
B)
human capital, money supply, and natural resources.
C)
government spending, labor supply, and physical capital.
Sources of sustainable long-run economic growth (increases in long-run aggregate supply) include increases in the labor force, human capital (the education and skill level of the labor force), the stock of physical capital, the supply of natural resources, and the level of technology. Increases in the money supply or government spending increase aggregate demand but do not increase long-run aggregate supply.
Which of the following is most likely to cause an increase in aggregate demand?
A)
Relative appreciation in the country’s currency.
B)
An increase in the general price level.
C)
High capacity utilization rates.
As capacity utilization rates increase to high levels (typically 80% to 85%), business investment in plant and equipment increases, shifting the AD curve to the right. A change in the price level represents a movement along the demand curve, not a shift in it. Appreciation of the country’s currency increases the cost of exports and reduces the cost of imports, which shifts the aggregate demand curve to the left (net exports decrease).
When potential real GDP is less than actual real GDP, the economy is most likely experiencing:
A)
recession.
B)
underemployment.
C)
inflation.
The economy is in an inflationary phase if actual real GDP is greater than potential real GDP. When actual real GDP equals potential real GDP, the economy is said to be at full employment. The economy is in a recessionary phase if real GDP is less than potential GDP.
If the economy is in short-run disequilibrium below full employment, the most likely explanation is that:
A)
money wage rates have decreased.
B)
long-run aggregate supply has decreased.
C)
aggregate demand has decreased.
A decrease in aggregate demand can reduce output below its full-employment level. A decline in long-run aggregate supply would mean the full-employment output level itself has decreased. Wage rates are assumed to be fixed in the short run, but the long-run effect of decreases in wage rates would be to increase (shift) short-run aggregate supply, leading to an increase in output.
Which of the following choices best describes the effects on consumption, investment, and net exports that would result from an increase in the price level, other factors held constant?
Consumption
Investment
Net exports
A)
Decrease
Decrease
Decrease
B)
Decrease
Increase
Increase
C)
Increase
Increase
Increase
At higher price levels, consumption, investment, and net exports all decrease. A rising price level decreases consumers’ real wealth, so they consume less. The higher price level will increase interest rates, which causes business investment to decrease. Rising domestic prices will also reduce foreign purchases of the country’s goods, decreasing net exports.
Which of the following is most likely to occur in the short run aggregate demand decreases due to a reduction in business and consumer optimism?
A)
A higher rate of inflation.
B)
An increase in real GDP.
C)
An increase in the rate of unemployment.
If business and consumer optimism wanes, consumers will spend less and defer current consumption and save more of their disposable income. With reduced product demand, businesses will reduce their capital expenditures and investments. These actions will lead businesses to reduce their number of employees, thereby increasing the rate of unemployment. Moreover, current output will decrease and the price level will fall.