Distinguish between real GDP and potential GDP and describe how each grows over time
What will be an ideal response?
Real GDP is the value of final goods and services produced in a given year when valued at the prices of a reference base year. Potential GDP is the maximum amount of real GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurial ability that would bring rising inflation. So real GDP is the actual amount produced with the actual level of employment of the nation's factors of production while potential GDP is the amount that would be produced if there were full employment of all factors of production with no shortages. Real GDP fluctuates from one year to the next, though it grows more often than it shrinks. Potential GDP grows from one year to the next because the quantity of the nation's resources and technology increase from one year to the next.
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If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will
a. increase consumption by $7,500. b. increase consumption by $2,500. c. decrease consumption by $7,500. d. decrease consumption by $2,500.
Which of the following would not be considered an investment in human capital?
a. education b. training programs c. transportation infrastructure d. literacy programs
When inflation rises people will
a. demand more money so the price level rises. b. demand more money so the price level falls. c. demand less money so the price level rises. d. demand less money so the price level falls.
Exhibit 2-13 Production possibilities curve
In Exhibit 2-13, in terms of efficiency:
A. point A is preferred to point B. B. point A is preferred to point E. C. point A is preferred to point D. D. point B is preferred to point A.