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Macro Economics

2b. A decrease in government funding for basic research in universities will likely result in a long-term slowing of output and research and development. Basic research conducted funded by the government has a low level of appropriability. However, such basic research leads to the "spillover" effect whereby producers can benefit from ancillary results as well as the stated goals of the research. High-tech goods (those directly affected by university research) will decline, while low-tech goods will be largely unaffected. In the following illustration of the production possibility frontier, the decline in high tech goods is shown in the shift from point a to point b.

3. A production function requiring increases in labor effort will result in a long-term decline in both aggregate supply and aggregate demand. Supply will decline because increased resources will be used to realize production gains (as opposed to realizing gains from increases in technology). Demand will decline because producers will be forced to reduce wages in order to remain profitable. This is illustrated in the following diagram where A is the equilibrium point before the shift and B is the equilibrium point after the shift.

4. The price of oil declining during the 1990s is likely to have had an effect on both inflation and unemployment, but is unlikely to be solely responsible for the strong performance of both in the United States. Oil prices affect inflation and unemployment because oil is used throughout the American economy in fundamental ways. Stable oil prices would mean that producers' costs increase more slowly than if oil prices were higher, and thus manufacturers can keep production high and prices low. However, oil is only one component in the economy's performance. Technological change (including the steady decline in computing resources) and capital accumulation


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Macro Economics. (1969, December 31). In Retrieved 22:21, October 13, 2015, from
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