Macroeconomics Midterm 2 Review – Step-by-Step Study Guidance

Q1. If an economy has an annual GDP growth rate of 7%, how many years will it take for the GDP to double?

Background

Topic: Economic Growth – Rule of 70

This question tests your understanding of how to estimate the doubling time of GDP using the Rule of 70, a shortcut for exponential growth calculations.

Key Terms and Formula:

• Rule of 70: A formula used to estimate the number of years it takes for a variable to double, given a constant annual growth rate.

Formula:

$\text{Doubling Time (years)} = \frac{70}{\text{Annual Growth Rate (%)}}$

Step-by-Step Guidance

1. Identify the annual growth rate: 7%.

2. Set up the Rule of 70 formula with the given growth rate.

3. Plug the values into the formula: $\frac{70}{7}$.

Try solving on your own before revealing the answer!

Final Answer: 10 years

$\frac{70}{7} = 10$

It will take approximately 10 years for GDP to double at a 7% annual growth rate.

Q2. Name the two components that make up "National Saving."

Background

Topic: Financial Markets – National Saving

This question tests your understanding of how national saving is defined in macroeconomics and its components.

Key Terms:

• National Saving: The total amount of saving generated within an economy, used to finance investment.

• Private Saving: Saving by households and businesses.

• Public Saving: Saving by the government (budget surplus or deficit).

Step-by-Step Guidance

1. Recall that national saving is the sum of private and public saving.

2. Think about what each component represents: private saving (by households/firms) and public saving (by government).

3. List both components clearly.

Try stating both components before revealing the answer!

Final Answer: Private Saving and Public Saving

National saving is made up of private saving (by households and firms) and public saving (by the government).

Q3. In the Market for Loanable Funds, what specific variable is measured on the vertical axis?

Background

Topic: Financial Markets – Loanable Funds Market

This question tests your understanding of the standard graph for the market for loanable funds.

Key Terms:

• Loanable Funds Market: The market where savers supply funds for loans to borrowers.

• Vertical Axis: The variable typically measured on the y-axis of a graph.

Step-by-Step Guidance

1. Recall what the market for loanable funds graph looks like.

2. Think about what is being determined in this market (the price of borrowing/lending).

3. Identify the variable that represents the "price" in this market.

Try identifying the variable before revealing the answer!

Final Answer: The Real Interest Rate

The real interest rate is measured on the vertical axis in the market for loanable funds.

Q4. If the government moves from a budget surplus to a budget deficit, which way does the supply curve for loanable funds shift?

Background

Topic: Financial Markets – Loanable Funds and Fiscal Policy

This question tests your understanding of how government budget changes affect the supply of loanable funds.

Key Terms:

• Budget Surplus: When government revenue exceeds spending.

• Budget Deficit: When government spending exceeds revenue.

• Supply Curve (Loanable Funds): Represents the total funds available for lending.

Step-by-Step Guidance

1. Recall that public saving is part of the supply of loanable funds.

2. Consider what happens to public saving when the government runs a deficit instead of a surplus.

3. Think about how a decrease in public saving affects the supply curve for loanable funds.

Try reasoning through the shift before revealing the answer!

Final Answer: To the left (decreasing the supply of loanable funds)

A budget deficit reduces public saving, shifting the supply curve for loanable funds to the left.

Q5. Does a change in the interest rate cause a "shift of" or a "movement along" the demand curve for loanable funds?

Background

Topic: Loanable Funds Market – Demand Curve

This question tests your understanding of the difference between a shift of a curve and a movement along a curve in economics.

Key Terms:

• Movement Along the Curve: Caused by a change in the variable on the axis (here, interest rate).

• Shift of the Curve: Caused by a change in a non-price determinant.

Step-by-Step Guidance

1. Recall what is on the vertical axis (real interest rate).

2. Think about what happens to the demand for loanable funds when the interest rate changes.

3. Decide if this is a movement along the curve or a shift of the curve.

Try answering before revealing the answer!

Final Answer: A movement along the curve

A change in the interest rate causes a movement along the demand curve for loanable funds, not a shift.

Q6. What specific economic metric is the best measure of a country's standard of living?

Background

Topic: Long-Run Economic Growth – Standard of Living

This question tests your understanding of how economists measure the standard of living across countries.

Key Terms:

• Real GDP per capita: Real Gross Domestic Product divided by the population; adjusts for inflation and population size.

Step-by-Step Guidance

1. Recall the definition of standard of living in macroeconomics.

2. Think about why we use "real" and "per capita" measures.

3. Identify the metric that best captures average economic well-being.

Try identifying the metric before revealing the answer!

Final Answer: Real GDP per capita

Real GDP per capita is the best measure of a country's standard of living because it accounts for both inflation and population size.

Q7. On a per-worker production function graph, what happens to the curve if there is a significant advancement in technology?

Background

Topic: Long-Run Economic Growth – Production Function

This question tests your understanding of how technological progress affects the production function.

Key Terms:

• Production Function: Shows the relationship between inputs (like capital per worker) and output per worker.

• Technological Advancement: Increases productivity for given inputs.

Step-by-Step Guidance

1. Recall what the per-worker production function graph looks like.

2. Think about how technology affects output for a given level of capital per worker.

3. Decide whether the curve shifts or changes shape.

Try reasoning through the effect before revealing the answer!

Final Answer: The curve shifts upward

A significant advancement in technology shifts the per-worker production function upward, indicating higher output for each level of capital per worker.

Q8. According to the "Catch-up Effect," do poor countries or rich countries typically grow at a faster rate?

Background

Topic: Long-Run Economic Growth – Catch-up Effect

This question tests your understanding of the catch-up effect in economic growth theory.

Key Terms:

• Catch-up Effect: The theory that poorer economies tend to grow more rapidly than wealthier ones when similar growth factors are present.

Step-by-Step Guidance

1. Recall the definition of the catch-up effect.

2. Think about why poor countries might grow faster than rich countries.

3. Identify which group typically experiences higher growth rates.

Try answering before revealing the answer!

Final Answer: Poor countries

Poor countries typically grow at a faster rate due to the catch-up effect, as they can adopt existing technologies and practices from richer countries.

Q9. Increasing the amount of capital per hour worked results in a movement along the production function; what is the term for the slowing rate of this benefit?

Background

Topic: Long-Run Economic Growth – Diminishing Returns

This question tests your understanding of the concept of diminishing returns to capital.

Key Terms:

• Diminishing Returns to Capital: As more capital is added, the additional output from each extra unit of capital decreases.

Step-by-Step Guidance

1. Recall what happens to output as more capital is added per worker.

2. Think about the term used to describe the decreasing additional output from extra capital.

3. Identify the economic term for this phenomenon.

Try naming the term before revealing the answer!

Final Answer: Diminishing returns to capital

The slowing rate of benefit from increasing capital per hour worked is called diminishing returns to capital.

Q10. Name two of the four "Growth Policies" that governments use to promote long-run growth.

Background

Topic: Long-Run Economic Growth – Growth Policies

This question tests your knowledge of government policies that can promote economic growth.

Key Terms:

• Growth Policies: Government actions aimed at increasing the economy's productive capacity.

Step-by-Step Guidance

1. Recall the main categories of policies that promote long-run growth (think about institutions, education, property rights, and incentives).

2. List at least two policies that fit these categories.

3. Be specific in naming the policies.

Try listing two policies before revealing the answer!

Final Answer: Rule of law, promoting education, protecting private property, or providing investment incentives

Any two of these four policies are correct: rule of law, promoting education, protecting private property, or providing investment incentives.