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Macroeconomics

Glenn Hubbard, Tony O'Brien

Chapter 10

Economic Growth, the Financial System, and Business

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Problem 1

By how much did real GDP per capita increase in the United States between 1900 and 2014? Discuss whether the increase in real GDP per capita is likely to be greater or smaller than the true increase in living standards.

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Problem 2

What is the rule of 70? If real GDP per capita grows at a rate of 5 percent per year, how many years will it take to double?

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Erwin A.
Numerade Educator

Problem 3

What two key factors cause labor productivity to increase over time?

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Ximena R.
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Problem 4

What is potential GDP? Does potential GDP remain constant over time?

EA
Erwin A.
Numerade Educator

Problem 5

Briefly discuss whether you would rather live in the United States of 1900 with an income of $\$ 1,000,000$ per year or the United States of 2016 with an income of $\$ 50,000$ per year. Assume that the incomes for both years are measured in 2016 dollars.

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Problem 6

Based on what you read about economic growth in this chapter, discuss the importance of growth in GDP, particularly real GDP per capita, to the quality of life of a country's citizens.

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Erwin A.
Numerade Educator

Problem 7

(Related to the Making the Connection on page 316) Think about the relationship between economic prosperity and life expectancy. What implications does this relationship have for the size of an economy's health care sector? In particular, is this sector of the U.S. economy likely to expand or contract in coming years?

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Problem 8

Use the following table to answer the questions.

$$\begin{array}{|c|c|} \hline {\text { Year }} & {\text { Real GDP (billions of } 2009 \text { dollars) }} \\ \hline {1990} & {\$ 8,955} \\ \hline {1991} & {8,948} \\ \hline {1992} & {9,567} \\ \hline {1993} & {9,521} \\ \hline {1994} & {9,905} \\ \hline \end{array}$$

a. Calculate the growth rate of real GDP for each year from 1991 to $1994 .$
b. Calculate the average annual growth rate of real GDP for the period from 1991 to 1994 .

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Erwin A.
Numerade Educator

Problem 9

As discussed in this chapter, real GDP per capita in the United States grew from about $\$ 6,000$ in 1900 to about $\$ 50,010$ in $2014,$ which represents an average annual growth rate of 1.9 percent. If the U.S. economy continues to grow at this rate, how many years will it take for real GDP per capita to double? If government economic policies meant to stimulate economic growth result in the annual growth rate increasing to 2.2 percent, how many years will it take for real GDP per capita to double?

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Problem 10

(Related to Solved Problem 10.1 on page 319 ) The business consulting firm McKinsey \& Company released a report on world economic growth that contained the observation "productivity needs to drive growth." Is it likely that McKinsey was referring to growth in real GDP or growth in real GDP per capita? Do you agree with this observation? Briefly explain.

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Erwin A.
Numerade Educator

Problem 11

(Related to Solved Problem 10.1 on page 319 ) An article in the Wall Street Journal notes that "raising productivity in the long run is the most effective way to elevate standards of living." Do you agree? Briefly explain.

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Problem 12

An article in the Economist notes, "For 60 years, from 1770 to 1830 , growth in British wages, adjusted for inflation, was imperceptible because productivity growth was restricted to a few industries." Not until the late nineteenth, when productivity "gains had spread across the whole economy," did a sustained increase in real wages begin. Why would you expect there to be a close relationship between productivity gains and increases in real wages?

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Erwin A.
Numerade Educator

Problem 13

(Related to the Making the Connection on page 320) Amartya Sen, a professor of economics at Harvard University and a Nobel Laureate, has argued, " For India to match China in its range of manufacturing capacity $\ldots$ it needs a better-educated and healthier labor force at all levels of society." What role do education and health care play in economic growth? How has India been able to experience rapid economic growth since 1991 despite poor education and health care systems?

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Problem 14

(Related to the Making the Connection on page 320 ) India's labor force has been gradually shifting out of the low-productivity agricultural sector into the higher-productivity service and industrial sectors.
a. Briefly explain how this shift is affecting India's real GDP per capita.
b. Is this shift likely to result in continuing increases in India's growth rate in coming decades? Briefly explain.

EA
Erwin A.
Numerade Educator