Q:As used in class, the "speed limit of the economy" is
A. 65 MPH
B. The growth of the labor force
C. The long-run potential growth rate
D. a and c
OPTION B THE GROWTH OF THE LABOR FORCE
an economy can do on a sustained basis is determined by how many people go to work each day and how productive they are when working.
Just two variables determine the limits of GDP growth, mind you. Those are growth in labor productivity and growth in the labor force. This iron law was first called to our attention by none other than Adam Smith himself.
Writing in "The Wealth of Nations" in 1776, Smith pointed out that the degree of wealth in a nation is "regulated by two different circumstances; first by the skill, dexterity, and judgment with which the Labour is generally applied; and secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed."
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