Financial systems and business cycles

a. What is the ‘rule of 70’? If real GDP per capita grows at a rate of 7 per cent per
year, how many years will it take to double?
b. What is the most important factor in explaining increases in real GDP in the
long run? What supportive government policies are crucial for long-run
economic growth?
a. After reading about economic growth in this chapter, elaborate on the
importance of growth in GDP, particularly real GDP per capita, to the quality of
life of a country’s population.
b. What is potential GDP? Does potential GDP remain constant over time?
3 The federal government in Australia has been running large budget deficits.
Assume the government has stated that it will take actions that will turn the budget
deficits into budget surpluses over time.
a Use a market for loanable funds graph to illustrate the effect of the
federal budget surpluses. What happens to the equilibrium real interest
rate and the quantity of loanable funds? What happens to the level of
saving and investment?
b Now suppose that households believe that surpluses will result in the
government cutting taxes in the near future, as they did in the 2000s
when there were budget surpluses. As a result, households increase
their consumption spending in anticipation of paying lower taxes. Briefly
explain how your analysis in part (a) will be affected.
a. People who live in rural areas often have less access to capital and, as a result,
their productivity is lower on average than the productivity of people who live in
cities. An article in The New York Times quotes a financial analyst as arguing that
‘the core driver’ of economic growth in China ‘is the simple process of urbanization’
(Irwin, 2014)iii
. What does the analyst mean by the ‘process of urbanization’?
b. Why is the role of the entrepreneur much more important in the new growth theory
than in the traditional economic growth model?
c. Many economists argue that if you really want to reduce world poverty then you
should be supporting free-trade negotiations and those investors jetting around the
world developing globalisation. What do free-trade negotiations and investors
jetting around the world have to do with reducing poverty?

Sample Solution