Page 869 - Krugmans Economics for AP Text Book_Neat

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SOLUTIONS TO AP REVIEW QUESTIONS

Module 39 Module 40
Check Your Understanding Check Your Understanding
1. A country that has high domestic savings is able to 1. Long-run economic growth is represented by an outward
achieve a high rate of investment spending as a percent shift of the production possibilities curve. Short-run fluc-
of GDP. This, in turn, allows the country to achieve a tuations are represented by a movement from a point
high growth rate. below the production possibilities curve toward a point
2. As you can see from panel (b) of the figure on p. 382, on the production possibilities curve (this shows an eco-
although it is important in determining the growth nomic recovery/expansion) or by a movement to a point
rate for some countries (such as those of Western farther below the production possibilities curve (this
Europe), the initial level of GDP per capita isn’t the only shows a recession/contraction).
factor. High rates of saving and investment appear to be 2. Long-run economic growth is represented by a rightward
better predictors of future growth than today’s standard shift of the long-run aggregate supply curve. Short-run
of living. fluctuations are represented by movements of short-run
3. The evidence suggests that both sets of factors matter: equilibrium output (the level of real GDP at the intersec-
better infrastructure is important for growth, but so is tion of short-run aggregate supply and aggregate
political and financial stability. Policies should try to demand) above or below potential output.
address both areas. Tackle the Test:
4. Growth increases a country’s greenhouse gas emissions. Multiple-Choice Questions
The current best estimates are that a large reduction in 1.
emissions will result in only a modest reduction in d
growth. The international burden sharing of greenhouse 2. a
gas emissions reduction is contentious because rich coun- 3. a
tries are reluctant to pay the costs of reducing their emis-
sions only to see newly emerging countries like China 4. c
rapidly increase their emissions. Yet most of the current 5. d
accumulation of gases is due to the past actions of rich
countries. Poorer countries like China are equally reluc- Tackle The Test:
tant to sacrifice their growth to pay for the past actions Free-Response Questions
of rich countries.
2. a. Aggregate
price
Tackle the Test: level LRAS
Multiple-Choice Questions SRAS
1. d
2. e P 2 E 2
3. a P 1 E 1
4. c
5. b AD 2
AD 1
Tackle the Test: Y Y Real GDP
Free-Response Question 1 P Potential
2. Physical capital, human capital, technology, and natu- Recessionary gap output
ral resources play roles in influencing long-run growth
in real GDP per capita. Increases in both physical capi-
tal and human capital help a given labor force to pro- b. Aggregate LRAS LRAS
duce more over time. Although economic studies have price 1 2
level
suggested that increases in human capital may explain SRAS 1
increases in productivity better than do increases in SRAS 2
physical capital per worker, technological progress is E 1
probably the most important driver of productivity
growth. Historically, natural resources played a promi-
nent role in determining productivity, while today E 2
they play a less important role in increasing productivi- AD
ty than do increases in human or physical capital in
most countries. Real GDP