Module 39
Check Your Understanding
- 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. - 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. - 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. - 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
- d
- e
- a
- c
- b
Tackle the Test:
Free-Response Question
- 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
- 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). - 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 - d
- a
- a
- c
- d
Tackle The Test:
Free-Response Questions - 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