Chapter 10The Theory of Economic Growth
1)A growing government budget deficit and national debt reduces economic growth because
A)it insures that future generations will have to pay the debt.
B)it reduces public investment.
C)it reduces household saving.
D)it diverts private savings from the financing of private investment.
2)The principle of compound interest insures that
A)a small difference in the per capita GDP between countries in one year will grow to a large difference in the long run.
B)a small difference in the per capita GDP growth rate between countries in one year will grow to a large difference in the long run.
C)U.S. interests are compounded by the interests of Great Britain and Germany.
D)U.S. interests are compounded by the interests of all other countries.
3)Probably the best measure of a country's economic growth is the growth of
A)real domestic investment.
B)real GDP.
C)real GDP per person.
D)real consumption expenditures.
4)The one determinant of the growth of capital per person that can be affected by policy is the
A)depreciation rate.
B)saving rate.
C)money supply growth.
D)rate of technological change.
5)The theory of economic growth divides the causes of growth into
A)elements affecting the output ratio and factors affecting population growth.
B)elements affecting the output ratio and factors affecting inflation.
C)elements affecting the amount of factor inputs available and the productivity of those inputs.
D)None of the above.
6)Economic growth is the result of two major or general "determinants":
A)capital and autonomous planned spending.
B)capital per capita and autonomous planned spending.
C)capital per capita and autonomous growth factors.
D)saving and autonomous growth factors.
7)Which of the following countries has had the fastest rate of economic growth since 1955?
A)United States
B)United Kingdom
C)Germany
D)Japan
8)When we study economic growth, we are most concerned about changes in
A)the output ratio.
B)the level of natural real output.
C)the absolute difference between natural and actual real output.
D)None of these.
9)When an equal percentage increase in the factors of production raises real GDP by the same percentage, the production function has the characteristic known as
A)constant returns to scale.
B)constant marginal productivity.
C)diminishing marginal productivity.
D)increasing returns to scale.
10)The level of capital per person would increase if
A)the average saving rate were higher.
B)the output-to-capital ratio increased.
C)the depreciation rate increased.
D)Both A and B.
11)The output-capital ratio (Y/K) depends on the following four determinants. Which determinant of these four is most likely to be affected by government growth policy?
A)the nature of the production function
B)the depreciation rate
C)the growth rate of labor input
D)the growth of capital per person
12)One of the main determinants of real GDP per person is the growth of capital per person. Which of the following variables does not determine the growth of capital per person in the long run?
A)average saving rate
B)output-to-capital ratio
C)marginal tax rate on investment
D)depreciation rate
13)The growth rate in the autonomous factor (a) in the production function can be directly influenced by all of the following except
A)environmental legislation.
B)support for research and development.
C)subsidies for education.
D)initiation of tax indexation.
14)Net investment is
A)savings less replacement savings.
B)replacement investment.
C)investment net of savings.
D)total investment less replacement investment.
15)In equilibrium, rate of growth of capital in a simple closed economy (i.e., x = 0) is determined primarily by
A)the growth rate of savings.
B)the level of saving less expenditures for replacement capital.
C)per capita well being.
D)the growth rate of replacement capital.
16)Steady state growth will occur according to Robert Solow when
A)y = k.
B)y = n.
C)kn = y.
D)k = n.
17)Steady state growth will occur according to Robert Solow when
A)the growth rate of output equals the growth rate of capital.
B)the growth rate of output equals the growth rate of population.
C)the growth rate of output times the population growth rate equals the growth rate of capital.
D)the growth rate of capital equals the growth rate of the population.
18)Solow's theory of economic growth concludes, "the possibility of steady growth would be a miraculous stroke of luck" because
A)the three "determinants," s, (Y/K) and n are caused by different unrelated behavior.
B)s reflects temporal consumption preferences.
C)d reflects unrelated depreciation.
D)n reflects birth control decisions.
19)According to the Solow model of economic growth, if per capita savings, s (Y/N)0, exceeds required steady state investment, (n + d) K/N, then
A)per capita output declines.
B)capital per capita increases.
C)capital per capita decreases.
D)steady state growth characterizes the economy.
20)The application of Solow's growth theory to the explanation of the slowdown in productivity growth in the U.S. suggests that the slowdown is primarily caused by
A)reduced growth in the capital stock per hour of work.
B)reduced growth in the technical change or total factor productivity.
C)slow residual growth of the capital stock.
D)ignorance since people save and invest less.
21)"Given the long run implication of Solow's growth model with respect to the rate of savings, the low savings rate in the U.S. is not a problem." This statement overlooks that over time it appears that
A)total factor productivity and the growth rate of capital per person are positively related.
B)total factor productivity and the growth rate of capital per person are inversely related.
C)total factor productivity and the difference between the growth rates of capital per capita and population are not related a and k - n are not related.
D)savings rates and per capita growth rates are inversely related.
22)The investment required to maintain steady state growth
A)is impossible to achieve since capital for new workers requires continuous increases in s, the per capita savings ratio.
B)must equip new workers with capital equal to that employed by existing workers.
C)must replace "worn out" capital.
D)B and C.
23)Suppose that the government passes a law requiring households to increase savings 10% above previous levels. According to Solow's growth theory, in the short run
A)output per capita grows more rapidly.
B)output per capita grows at the constant steady state rate, n.
C)output per capita stays constant.
D)None of the above.
24)Suppose that the government passes a law requiring households to increase savings 10% above previous levels. According to Solow's growth theory, in the long run
A)output per capita grows more rapidly.
B)output per capita grows at the constant steady state rate, n.
C)output per capita stays constant.
D)None of the above.
25)If technological change is "labor augmenting" then
A)output per worker declines, output per unit of capital increases.
B)"effective labor input" increases, output per unit of capital declines.
C)output per worker increases, output per unit of capital is constant.
D)Both output per worker and output per unit of capital change.
26)If technological change is "neutral" then
A)output per worker declines, output per unit of capital increases.
B)"effective labor input" increases, output per unit of capital declines.
C)output per worker increases, output per unit of capital is constant.
D)Both output per worker and output per unit of capital change.
27)Change in "total factor productivity" may be explained by
A)the relative rates of growth of crime and pollution control measures.
B)changes in the quality and composition of the labor force.
C)changes in the scale of production.
D)All of the above.
Figure 10-1
28)Initially, the economy is at point B on Figure 10-1. According to the Solow growth model, an increase in the output per capita without an increase in capital per worker is represented by ______and could be the result of
A)the movement B to E; new technology discoveries.
B)the movement B to H; improved health and education per worker.
C)the movement B to C; an increase in the savings rate.
D)the movement B to F; a decrease in the savings rate.
29)Initially, the economy is at point B on Figure 10-1. According to the Solow model of growth, in the short run, the discovery of a cold fusion process which reduces the cost of energy by 50%, ceteris paribus, will shift the economy from ______.
A)B to H, increasing per capita output without increasing capital per capita
B)B to C, increasing per capita output with increasing capital per capita
C)B to C, increasing per capita output without increasing savings
D)B to I, increasing output, saving and capital per capita
Figure 10-2
30)Initially, the economy is at point B on Figure 10-2. According to the Solow growth model, a dramatic decrease in the rate of saving after complete adjustment shifts the economy from ______.
A)B to H, increasing output per capita
B)B to C, increasing output and capital per capita
C)B to D, decreasing the output and capital per capita in the long run
D)B to E, decreasing output per capita but holding per capita capital constant
31)If the economy is characterized by diminishing or decreasing returns to scale, then a
A)doubling of inputs will lead to a constant output.
B)a doubling of inputs will lead to a constant output.
C)doubling of inputs will lead to a two-fold increase in output.
D)doubling of inputs will lead to a less than two-fold increase in output.
32)If the economy is characterized by increasing returns to scale, then a
A)doubling of inputs will lead to a more than two-fold increase in output.
B)a doubling of inputs will lead to a constant output.
C)doubling of inputs will lead to a two-fold increase in output.
D)doubling of inputs will lead to a less than two-fold increase in output.
33)In the context of growth, the goal of stabilization policy once per capita output is equal to potential per capita output is to
A)insure that the percentage change in per capita output and potential per capita output over time are equal.
B)raise the growth rate of potential per capita output above that of per capita output.
C)raise the growth rate of per capita output above that of potential per capita output.
D)None of the above is correct.
Figure 10-3
34)Initially, the economy is at point B on Figure 10-3. We conclude that before adjustment
A)per person savings is at point D and the level of steady state investment is at point C.
B)per person savings is at point E and the level of steady state investment is at point E.
C)per person savings is at point G and the level of steady state investment is at point E.
D)per person savings is at point C and steady state investment is at point D.
35)Initially, the economy is at point B in Figure 10-3. We may conclude that over time
A)per person saving and steady state investment will remain stable at points C and D respectively.
B)per person capital will grow, point D to E since per capita savings exceed steady state investment, point C is greater than point D.
C)per person capital will grow, point D to E since per capita savings is less than steady state investment, point C is greater than point D.
D)per person saving and steady state investment will remain stable at points D and C respectively.
36)The economy will grow from points B to G in Figure 10-3 over time because
A)per person saving and steady state investment will remain stable at points C and D respectively.
B)per person capital will grow, point D to E since per capita savings exceed steady state investment, point C is greater than point D.
C)per person capital will grow, point D to E since per capita savings is less than steady state investment, point C is greater than point D.
D)per person saving and steady state investment will remain stable at points D and C respectively.
Figure 10-4
37)Initially, the economy is at point G in Figure 10-4. An increase in per capita savings from s(0) to s(1) will in the short run result in ______and in the long run result in ______.
A)excess per capita saving; more rapid growth in per capita output
B)excess per capita saving; less rapid growth in per capita output
C)more rapid growth in per capita output; more rapid growth in per capita output
D)more rapid growth in per capita output; no change in the long run rate of growth in per capita output
38)Initially, the economy is at point G in Figure 10-4. A change in per capita savings ______will after complete adjustment ______.
A)point X to point E; lower the growth rate of output per capita
B)point X to point E; raise the growth rate of output per capita
C)point E to point X; raise output and saving but not the growth rate of output per capita
D)point E to point X; raise output and saving and the growth rate of output per capita
39)If the economy is characterized by constant returns to scale then a
A)doubling of inputs will lead to a more than two-fold increase in output.
B)doubling of inputs will lead to a constant output.
C)doubling of inputs will lead to a two-fold increase in output.
D)doubling of inputs will lead to a less than two-fold increase in output.
40)Which of the following is not a real world factual conflict with the neoclassical growth model?
A)Income per capita varies greatly across countries.
B)Poor countries do not have a higher rate of return on capital.
C)Immigrant labor from poor countries experiences very small increases in income when it moves to rich countries.
D)poor countries' income levels have not converged to the income levels of rich countries.
41)Which of the following is not a reason for differences in per capita income in neoclassical growth theory?
A)All countries have the same production function.
B)Countries have different savings rates.
C)The slope of the steady-state investment line is different for different countries.
D)all of the above.
42)In the neoclassical growth theory
A)small differences in the saving rate or population growth cause large variations in per capita income.
B)large differences in the saving rate or population growth rate cause small variations in per capita income.
C)large differences in the saving rate or small differences in population growth cause large variations in per capita income.
D)small differences in the saving rate or large differences in population growth cause large variations in per capita income.
43)Given that all countries have the same Cobb-Douglas production function, i.e., Y/N = (K/N)b, a ten-fold difference in per capita income requires a difference in capital per capita by a factor of
A)10.
B)10b.
C)101/b.
D)b.
44)Given that all countries have the same Cobb-Douglas production function, i.e.n Y/N = (K/N)b , where b = 0.5, then a ten-fold difference in per capita income requires a difference in capital per capita by a factor of
A)10.
B)100.
C)1000.
D)10,000.
45)In the real world, the K/Y ratio
A)is much higher in rich countries than in poor countries.
B)is much lower in rich countries than in poor countries.
C)is roughly equal across rich and poor countries.
D)cannot be properly compared except between countries of similar income levels.
46)In the neoclassical growth theory, differences in per capita income are determined by differences in the
A)saving rate.
B)population growth rate.
C)depreciation rate.
D)all of the above.
47)The slope of the per person production function is
A)the marginal product of labor.
B)the marginal product of capital.
C)lower for a poor country than for a rich country.
D)higher for a rich country than for a poor country.
48)The neoclassical growth theory implies that
A)the marginal product of capital is low in poor countries.
B)the rate of return on capital is low in poor countries.
C)there should be large flows of capital from rich countries to poor countries.
D)all of the above.
49)Using a Cobb-Douglas production function, Y/N = (K/N)b , the marginal product of capital is
A)b(K/N)b-1.
B)b(K/N).
C)(K/N)b-1.
D)(K/Y)b.
50)The rate of return on capital is
A)much higher in rich countries than in poor countries.
B)much lower in rich countries than in poor countries.
C)not substantially higher in poor countries than in rich countries.
D)not substantially higher in rich countries that in poor countries.
51)Which of the following "factors of production" is included in the neoclassical growth theory?
A)skills and education of the workforce
B)cultural attitudes toward work
C)effectiveness of the legal system in protecting property rights
D)labor measured in units of effective labor
E)all of the above
52)The neoclassical model predicts that nations that are initially poor should have
A)slower growth rates than nations that are rich.
B)faster growth rates than nations that are rich.
C)growth rates equal to those of nations that are rich.
D)negative growth rates.
53)Which of the following are not examples of "convergence"?
A)Japan and Europe
B)Individual states within the United States
C)regions within western Europe
D)major nations in Latin America and Western Europe
54)In the context of the neoclassical growth model, which of the following does not explain the growth rates of countries which are initially poor?
A)nations which are below their steady-state growth paths will grow more slowly until they reach the steady state
B)the rate of return is higher in poor countries
C)capital flows from rich countries to poor countries
D)the passage of time allows poor countries to adopt the productive techniques of rich countries.
55)The per person production function representing both physical capital per person (K/N) and human capital per person (H/N) is
A)Y/N = (K/N)b(H/N)c
B)Y/N = (K/N)b + (H/N)c
C)Y/N = (K/N)b - (H/N)c
D)Y/N = (K/N)b / (H/N)c
Answer: A
56)Use b as the exponent for physical capital, and c as the exponent for human capital. Assume that b = 0.25 and c = 0.60. Further assume that per person income of a rich country is 10 times that of a poor country.
A)What is the value of the exponent for uneducated labor (L)?
B)0.75
C)0.40
D)0.35
E)0.15
Answer: D
57)What is the approximate value of the multiple of combined physical and human capital that the rich country must have in order to produce 10 times the output per person of the poor country.
A)1000