CHAPTER 27: THE CLASSICAL LONG-RUN POLICY
MODEL: GROWTH AND SUPPLY-SIDE POLICIES
Questions and Exercises
1. Economic growth allows everyone in society, on average, to have more. It
generates jobs and increases income and therefore consumption. Costs include
2. Using the rule of 72:
3. Through free trade, countries can specialize in the goods in which they have a
4. A person living in 1910 is most likely to have worked more to buy a dozen eggs
than the person living in 2017. The reason is that, since 1910, the United States
5. Real growth rate per capita = Real output growth – Population growth.
a. Congo: -1.8 – 3 = -4.8%.
6. Informal property rights limit growth by limiting the size of companies (they must
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7. An increase in saving in the United States can lead to an increase in investment.
As investment in the economy increases, total output in the economy will increase
8. The loanable funds market is shown in the accompanying graph. The supply of
loanable funds (savings) is shown by the supply curve while the demand for
Quantity of loanable funds
i0
Q0
Demand
Supply
9. a. If government increases spending without increasing taxes, the demand for
loanable funds will shift to the right as shown in graph a below. The interest rate
b. If businesses become more productive, the demand for loanable funds will shift to
the right and the interest rate will rise as shown in graph b below. More
c. If people save more the supply of loanable funds will shift out to the right, leading
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Quantity of loanable funds
i
0
Q0Q1
D0
S0
D1
i
1
Quantity of loanable funds
i
0
Q0Q1
D0
S0
D1
i
1
Quantity of loanable funds
i
0
Q0Q1
D
S1
i
1
(a) (b) (c)
S0
10. Three types of capital are physical capital, human capital, and social capital.
Physical capital includes the buildings and machines that are available for the
11. Two ways in which growth through technology differs from growth through the
accumulation of physical capital are: (1) Accumulation of physical capital
12. Thomas Malthus based his prediction that population growth would exceed the
13. Thomas Malthus’ prediction did not come true because of technological progress
14. a. Both theories recognize a role for saving and investment in the growth process.
15. a. Increase growth.
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16. Spillover effects are the effects that technological advance impacts technological
17. Network externalities are when the use of a good by one individual makes that
18. Since there was no investment, it could not be due to an increase in capital. There
19. The answer could be “yes” or “no.” To the extent that the innovation is made
Questions from Alternative Perspectives
1. Austrian
a. No, in absolute terms, the poor have not become poorer.
b. Based on the growth model, as more capital in collected, one would expect the
2. Institutionalist
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3. Post-Keynesian
a. Post-Keynesians believe that such a policy would be consistent with new growth
4. Radical
a. The arguments could fit in. For example, the book lists formalizing property rights as
a “growth policy” but it does not state what the nature of those formalized property
rights are. Property rights that protect monopoly such as intellectual property rights
do create income inequality, whereas a property rights structure that recognizes that
b. Most Radical economists believe that standard economics emphasizes the need for
inequality to bring about growth far more than is the case. But ultimately, this is an
5. Religious
Most religiously oriented economists see that property rights are consistent with
Issues to Ponder
1. a. Answers will vary. Students can do some research about developing countries
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b. Answers will vary. The question asks students to compare what it is like to live
today compared to 100 years ago. Answers will mention the lack of some
2. The answer to this question is more complicated than comparing increases in
relative income. In terms of real income, the poor are doing relatively better than
the rich because growth has made everyday goods available to the poor that
3. In the short run, if a politician is to implement a policy to encourage saving, it
might inhibit aggregate spending causing income growth to stagnate, so the policy
4. Political structure can be viewed as a type of capital if it contributes to
production. The longer a country is a democracy, the stronger and more
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.