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Unit 2 Study Guide Review Chapter 10 Question 1 It is widely accepted among economists that increases in __________ __________ determine improvements in the standard of living. What are the three ways that labor productivity can increase? #1. #2. #3. Which of these three does long-run economic growth ultimately depend on? Question 2 Give an example using the “Rule of 70” that demonstrates how quickly the standard of living in a country could double (use any numbers you want to). Using the Rule of 70, how long would it take for my investment of $ 100,000 to double if the stock is growing at 3.5 %? What is the equation to calculate the percentage change in real GDP (Y)? Question 3 Use the equations from class to prove that national saving (S) and investment (I) are equal in the long-run. Assume the economy is closed (NX = 0). Question 4 Draw a graph showing how an increase in G affects the market for loanable funds. In the new equilibrium, what is the effect on private investment (I)? What do we call this? Question 5 Draw a complete business cycle. Label the peaks, the troughs, expansions, and recessions. Explain how the inflation rate and the unemployment rate behave over the course of the business cycle. 1 List and explain three reasons why the business cycle has become less severe in the United States in the past five decades. #1. #2. #3. Chapter 12 Question 1 List and explain the four categories of spending in an economy. #1. #2. #3. #4. Therefore, A.E. = ____________________. Question 2 With respect to consumption spending (C), what five variables influence it? #1. #2. #3. #4. #5. Which one of these components is the most important to consumption? Question 3 2 Determining the level of aggregate expenditure (A.E.) in the economy Term Definition or Equation Consumption Function Marginal Propensity Consume (MPC) to Question 4 Suppose your marginal propensity to consume (MPC) is 0.75. How much will your consumption change if your disposable income (YD) rises from $ 10,000 to $ 20,000? Question 5 Graphing Macroeconomic Equilibrium Draw the 45°-line discussed in class. Clearly label the axes. What does this graph represent? Now draw a line that represents the aggregate expenditure (A.E.) function for an economy on the same graph. Question 6 On the horizontal axis of your Keynesian cross above, identify three unique levels of real GDP: a) a point where real GDP is equal to A.E. (Point A) b) a point where real GDP is less than A.E. (Point B) c) a point where real GDP is greater than A.E. (Point C) Question 7 Of these three different GDP levels you identified, which one of these points represents an economic expansion? In this situation (an economic expansion), how will the economy adjust to reach its true macroeconomic equilibrium? 3 Question 8 Of these three different GDP levels you identified, which one of these points represents a recessionary? In this situation (an economic contraction), how will this economy adjust to reach its true macroeconomic equilibrium? 4