ECON 151

Prepare: Chapter 10
Name:
Section:

In order to get full credit, answer all questions in either bold font or red font.
Read Chapter 10 in the Hubbard/O’Brien text.

1. Define long-run economic growth. According to Hubbard, what is the best measure of standard of
living?

2. What is the rule of 70? Include in your answer the formula and what it tells us about economic
growth.

3. Define labor productivity. What role does labor productivity play in long-run economic growth?
What are the two key factors that determine labor productivity, and which of these two is the most
important?

4. What is potential GDP? What does it tell us about economic growth? When actual real GDP and
potential GDP diverge, what does that tell us about the state of the economy?

5. Define the financial system. What are financial markets? What are financial intermediaries? Why is
the financial system so crucial for economic growth?

6. What does private saving equal? What does public saving equal? What must total saving (private plus
public saving in a closed economy) always equal? Why does a budget deficit decrease total saving in
the economy?

7. What is the market for loanable funds? Who demands loanable funds, and why do they demand these
funds? Why is the demand for loanable funds downward sloping?

8. Who supplies loanable funds, and why is the supply of loanable funds upward sloping?

9. What factors shift demand for loanable funds? What factors shift the supply for loanable funds? What
is “crowding out”?

10. What are the four phases of the business cycle, and in what order do they occur? Why does the
production of consumer durable goods fluctuate more than real GDP over the business cycle?

11. How does the business cycle affect the inflation rate? The unemployment rate?