Economics Overview Quiz

Capital-to-Labor Ratio

• When the capital-to-labor ratio increases, a construction crew is given more backhoes.
• The capital-to-labor ratio is a measure of the amount of capital per worker in an economy.

GDP and Output Growth

• GDP is the total value of all goods and services produced in an economy.
• GDP is a measure of output.
• GDP growth can be calculated by multiplying the growth rates of output and labor.
• For example, a 10% growth in output and a 10% growth in labor would result in a 100% growth in GDP.

Currency Appreciation and Aggregate Demand/Supply

• If a country's currency appreciates, exports become more expensive, and imports become cheaper.
• This will lead to a decrease in aggregate demand (AD) as exports fall and imports rise.
• Aggregate supply (SRAS) will rise due to cheaper imported goods.

Inflation & Unemployment

• Simultaneous inflation and unemployment can be addressed by implementing policies that shift the short-run aggregate supply curve to the right.
• Shifiting the aggregate demand curve left or right will only address inflation or unemployment on its own.
• Increasing output through shifts in SRAS will lower costs of goods and create more jobs.

Short-Run vs. Long-Run Effects of Increased Spending

• Increased consumer spending in the short run will increase prices and output.
• In the long run, prices will rise further and output will return to its potential level as resource constraints and price adjustments occur.

Human Capital

• Investment in human capital refers to activities that improve the skills, knowledge, and abilities of individuals.
• Examples include apprenticeships, universal education policies, and on-the-job training.
• Acquiring obsolete skills is not an example of investment in human capital.

Aggregate Supply

• A decrease in firms' market power, leading to more competition, can increase aggregate supply.
• This is because firms may lower prices and increase output to stay competitive.

Developing Countries

• Developing countries tend to have limited capital and resources.

Infrastructure

• Infrastructure refers to the fundamental facilities and systems serving a country, city or other area, including public services, transport networks, communication systems, and power supply.
• An example of infrastructure is an elementary school.
• Examples of capital or natural resources, NOT infrastructure, are a computer manufacturing plant, coal mine, or drained swamp.

Long-Run Aggregate Supply (LRAS)

• The LRAS curve is vertical at full employment because the economy’s output is determined by its resources (labor, capital, technology, and natural resources) in the long run.
• The economy operates at its maximum sustainable level of output, regardless of changes in the price level, in the long run.

Taxes and Aggregate Demand

• Increased taxes shift the aggregate demand curve to the left and decrease output demanded.
• Consumers have less disposable income to spend when taxes are higher.

Long-Run Effects of Changing Natural Rate of Unemployment

• Increasing an economy's natural rate of unemployment in the long run will lead to increased inflation.
• This is because the natural rate of unemployment is the lowest sustainable unemployment rate in the long run.

Determinants of Short-Run Aggregate Supply

• Changes in input prices, taxes, business expectations, and inflationary expectations are determinants of short-run aggregate supply.

Capital-to-Labor Ratio and Wages

• A country with a low capital-to-labor ratio tends to have low labor productivity and low wages.
• This is because workers have fewer tools and capital to work with, resulting in lower output per worker.

Short-Run Economic Growth

• A situation associated with short-run economic growth is an increase in employment, which reduces the unemployment rate.
• This is because short-run growth is typically characterized by an increase in economic activity and utilization of existing resources.

Shifting the Aggregate Supply Curve

• A shift to the right of the aggregate supply curve can cause the price level to decrease and employment to increase.
• By producing more goods and services, businesses can lower prices and hire more workers.

Business Expectations & Aggregate Demand

• Improved business expectations will shift the aggregate demand curve to the right.
• This is because businesses will invest more and spend more when they are more optimistic about the future.

Economic Growth and Aggregate Supply

• Economic growth is represented by a shift to the right of the long-run aggregate supply curve.
• This indicates an increase in the economy's potential output.

Short-Run Aggregate Supply Curve

• The short-run aggregate supply curve slopes upward because input prices are not fully flexible in the short run.
• Firms are willing to supply more at higher prices when input costs are relatively fixed.

Price Spikes and Economic Output

• Energy price spikes will decrease output in the short run, but output will return to its long-run equilibrium level in the long run.

Determinants of Short-Run Aggregate Supply

• Many inputs, such as wages and raw materials, are slow to change in the short run.
• This leads to the upward slope of the short-run aggregate supply curve.

Entrepreneurship

• The ability to use physical resources in creative ways to produce goods and services is known as entrepreneurship.
• It combines human productivity with capital production.

Labor

• Labor includes all of the physical and mental talents of people.
• Labor is the time and effort provided by individuals in the production of goods and services.

Determinants of Aggregate Supply

• Productivity is a determinant of aggregate supply.
• Productivity refers to the efficiency with which inputs are converted into outputs.

Falling Price Level and Output Demanded

• A falling aggregate price level will increase demand for a country's exports, which will increase output demanded.
• This is because lower prices make a country's goods and services more attractive to foreign buyers.