Explain how the labor market and the production function determine potential GDP
What will be an ideal response?
The labor market determines the equilibrium quantity of labor. In other words, the amount of employment is determined by supply and demand in the labor market. The production function shows the amount of output, real GDP, that is produced for all different amounts of employment. Intuitively, the production function "converts" the amount of employment from the labor market into real GDP. If the labor market is in equilibrium, so that the level of employment is equal to full employment, then the amount of real GDP produced, determined from the production function is potential GDP.
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The monetary transmission mechanism that assumes that money supply growth stimulates the economy primarily by encouraging investment is
A) the classical transmission mechanism. B) pre-Keynesian transmission mechanism. C) the interest-rate-based transmission mechanism. D) the post-Keynesian transmission mechanism.
Beer and wine were difficult to find during the prohibition on alcohol, but whisky and gin were plentiful. Why?
A) Beer and wine were illegal; whisky and gin weren't. B) The drinking public only wanted whisky and gin. C) Criminals found it much more efficient to produce liquor. D) Police were willing to overlook production and consumption of whisky and gin because they believed liquor was less dangerous than beer and wine. E) Government officials were interested in seeing what would happen to rate of alcohol poisoning in the United States.