AP_Krugman_Textbook

Module 39

Check Your Understanding

1. A country that has high domestic savings is able to
   achieve a high rate of investment spending as a percent
   of GDP. This, in turn, allows the country to achieve a
   high growth rate.


2. As you can see from panel (b) of the figure on p. 382,
   although it is important in determining the growth
   rate for some countries (such as those of Western
   Europe), the initial level of GDP per capita isn’t the only
   factor. High rates of saving and investment appear to be
   better predictors of future growth than today’s standard
   of living.


3. The evidence suggests that both sets of factors matter:
   better infrastructure is important for growth, but so is
   political and financial stability. Policies should try to
   address both areas.


4. Growth increases a country’s greenhouse gas emissions.
   The current best estimates are that a large reduction in
   emissions will result in only a modest reduction in
   growth. The international burden sharing of greenhouse
   gas emissions reduction is contentious because rich coun-
   tries are reluctant to pay the costs of reducing their emis-
   sions only to see newly emerging countries like China
   rapidly increase their emissions. Yet most of the current
   accumulation of gases is due to the past actions of rich
   countries. Poorer countries like China are equally reluc-
   tant to sacrifice their growth to pay for the past actions
   of rich countries.

Tackle the Test:

Multiple-Choice Questions

1. d


2. e


3. a


4. c


5. b

Tackle the Test:

Free-Response Question

2. Physical capital, human capital, technology, and natu-
   ral resources play roles in influencing long-run growth
   in real GDP per capita. Increases in both physical capi-
   tal and human capital help a given labor force to pro-
   duce more over time. Although economic studies have
   suggested that increases in human capital may explain
   increases in productivity better than do increases in
   physical capital per worker, technological progress is
   probably the most important driver of productivity
   growth. Historically, natural resources played a promi-
   nent role in determining productivity, while today
   they play a less important role in increasing productivi-
   ty than do increases in human or physical capital in
   most countries.

Module 40

Check Your Understanding

1. Long-run economic growth is represented by an outward
   shift of the production possibilities curve. Short-run fluc-
   tuations are represented by a movement from a point
   below the production possibilities curve toward a point
   on the production possibilities curve (this shows an eco-
   nomic recovery/expansion) or by a movement to a point
   farther below the production possibilities curve (this
   shows a recession/contraction).


2. Long-run economic growth is represented by a rightward
   shift of the long-run aggregate supply curve. Short-run
   fluctuations are represented by movements of short-run
   equilibrium output (the level of real GDP at the intersec-
   tion of short-run aggregate supply and aggregate
   demand) above or below potential output.
   Tackle the Test:
   Multiple-Choice Questions


3. d


4. a


5. a


6. c


7. d
   Tackle The Test:
   Free-Response Questions


8. a.

b.

Real GDP

Aggregate

price

level

E 2

E 1

LRAS 1 LRAS 2

SRAS 2

SRAS 1

AD

Aggregate

price

level

E 2

E 1

LRAS

SRAS

AD 1

AD 2

P 1

P 2

Y 1 YP Real GDP

Recessionary gap

Potential

output

SOLUTIONS TO AP REVIEW QUESTIONS S-23