Econ 103 Mid

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103 Midterm Answer (Fall 09)

Q1:
1a)
Economic growth occurs when a country chooses to allocate some of its resources to the production of capital goods, instead of consumption goods. This expands the resource base, allowing the country to produce more goods and services thus furthering economic growth. Economic growth can also occur when more productive technology is used. Technology makes the production process more efficient so more goods and services can be produced without increasing the amount of available resources.

The economic growth can be seen as an outward shift of the PPC as seen in the graph.

b) Vicious circle of poverty – A country is poor because it does not produce capital goods and it does not produce capital goods because it is poor. The country channels all its available resources to the production of consumption goods in order for the people to survive and have subsistence level of living.

Q2:
2. the shape of the AS curve is based on employment level and resource availability (1) horizontal part indicates a high level of unemployment because the resource of labor is available, employers can hire without increasing wages. This cause GDP to increase without an increase in price (2) upward slop is a strain on resources that are now not as commonly available. Firms can still increase production but not without increasing price. Both GDP and price increase. (3) vertical part represents full employment. There are no more resources available to increase production. So GDP remains constant. Inflation occurs because firms increase prices without increasing GDP.

Q4:
4) The following example on how consumers and producers behave will illustrate what happens when S> Ii. Suppose autonomous consumption is $60 and MPC is 0.8

Consumers Producers
Y=$900Y=$900
Y=C+SY=C+I
C=a+bYIi = $100 (planned investment)
C= 60 + 0.8 (900)= $780C=$800
S=120Ia = $120 (actual investment)

In this example, at Y=$900, when S>...
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