Deck 12: Growth Theory

Question 1

According to modern growth theory, the key to economic growth is

A) paved roads.
B) modern buildings.
C) skilled labor.
D) a large pool of unskilled labor.
E) institutions.

Answer 1

E

Question 2

The relationship between the growth rate of real gross domestic product (GDP) and the growth rate of real investment is

A) positive.
B) negative.
C) unpredictable.
D) nonexistent.
E) positive at low levels of real GDP and then negative at higher levels of GDP.

Answer 2

positive.

Question 3

The production function describes the relationship between

A) inflation and unemployment in the economy.
B) the firm's inputs and outputs.
C) the levels of output and spending in the economy.
D) the aggregate supply and demand for goods in the economy.
E) the firm's output and the price level.

Answer 3

B

Question 4

A restaurant's production function would show the relationship between the

A) number of workers hired and the number of meals served.
B) number of workers hired and the level of profit.
C) level of profit and the number of meals served.
D) level of profit and the cost of producing the meals.
E) number of workers hired and the cost of producing the meals.

Question 5

According to modern growth theory, a country that wants to foster long-run economic growth and the accumulation of wealth should focus on

A) its institutions.
B) acquiring physical capital.
C) its supply of unskilled labor.
D) its educated workforce.
E) acquiring modern buildings.

Question 6

Which of the following is true?

A) Economists formulate a theory and then sometimes try to verify the theory with real-world observations.
B) Real-world observations are used to formulate an economic theory, but this is of little use to policymakers.
C) Once an economic theory is developed, it is rarely tested against real-world observations.
D) When a policymaker has an idea about how to advance economic growth, he or she will ask an economist to formulate a theory, and then this will be compared to real-world observations.
E) Real-world observations motivate economists to formulate theories about how economic growth evolves, and these theories are then used and reevaluated as new data become available.

Question 7

Economic theories about growth

A) are mainly used for intellectual debate.
B) are mainly used for teaching.
C) are not based on real-world facts.
D) are used to set economic policies that impact human lives.
E) have had no influence on government policy.

Question 8

The graphical relationship between real gross domestic product (GDP) and capital is called the

A) steady state.
B) capital function.
C) production function.
D) investment function.
E) marginal product curve.

Question 9

Which best explains the relationship between physical capital and the level of wealth in a country?

A) As countries become wealthier, they acquire more physical capital.
B) As countries acquire more physical capital, they become wealthier.
C) Wealthier countries invest less in physical capital.
D) Poor countries can only become wealthier if they acquire more physical capital.
E) A country does not need physical capital to increase wealth.

Question 10

In equation form, the production function for a single firm can be expressed as

A) q = f(human capital, physical capital).
B) q = f(price of output, price of inputs).
C) q = f(labor, price of inputs).
D) q = f(price of inputs, profit).
E) q = f(production cost, profit).

Question 11

Economic models are

A) complex representations of reality.
B) not related to real-world observations.
C) used by teachers but not policymakers.
D) updated as new real-world data become available.
E) rarely reevaluated.

Question 12

The aggregate production function describes the relationship between the total output in the economy and

A) physical capital, human capital, and natural resources.
B) total spending in the economy.
C) total income earned in the economy.
D) the inflation rate.
E) the unemployment rate.

Question 13

The growth theory we study today was formulated

A) during the Great Depression.
B) during the 1970s.
C) during the 1950s.
D) in 1776 by the work of Adam Smith.
E) over 100 years ago.

Question 14

The main focus of the Solow growth model is

A) physical capital.
B) human capital.
C) institutions.
D) natural resources.
E) labor.

Question 15

Economic growth is determined by

A) the rate of inflation.
B) the size of the population.
C) geography.
D) cultural factors.
E) resources, technology, and institutions.

Question 16

An example of physical capital is

A) a well-run government.
B) a well-developed banking system.
C) skilled labor.
D) paved roads.
E) educated teachers.

Question 17

If the production function in the Solow growth model is given by q = f(human capital, physical capital), then in this model

A) there is no investment.
B) there is no labor.
C) labor is represented by the human capital variable.
D) there is no depreciation.
E) there is no economic growth.

Question 18

Economic growth theory is based on

A) the Ricardian growth model.
B) the Solow growth model.
C) business cycle theory.
D) the theory of supply and demand.
E) the theory of investment.

Question 19

Economic growth theory originated about 60 years ago as a result of contributions by

A) Robert Solow.
B) Adam Smith.
C) David Ricardo.
D) Alan Greenspan.
E) Ben Bernanke.

Question 20

The early Solow model focused on

A) the skill level of workers.
B) the labor supply.
C) government policy.
D) the availability of capital goods.
E) institutions.

Question 21

Consider the data in the following table.
$$\begin{array} { l c c } \hline \text { Year } & \begin{array} { c } \text { Growth Rate of } \\\text { Real Investment }\end{array} & \begin{array} { c } \text { Growth Rate } \\\text { of Real GDP }\end{array} \\\hline 1 & 0 \text { percent } & 2 \text { percent } \\2 & - 2 \text { percent } & - 3 \text { percent } \\3 & 3 \text { percent } & 5 \text { percent } \\4 & - 1 \text { percent } & 0 \text { percent } \\5 & 1 \text { percent } & 1 \text { percent } \\\hline\end{array}$$

Do the data match the experience of a developed country like the United States?

A) Yes, because the two growth rates are positively correlated.
B) No, because the two growth rates should be positively correlated.
C) Yes, because the two growth rates are negatively correlated.
D) No, because the two growth rates should be negatively correlated.
E) Yes, because these two growth rates are unrelated.

Question 22

Use the following graph to answer the next five questions.

Consider a country that improves its educational system such that a greater percentage of workers become college educated. It is reasonable to expect

A) the production function will shift upward.
B) the production function will shift downward.
C) there will be an upward movement along the production function.
D) there will be a downward movement along the production function.
E) there will be no effect on the production function.

Question 23

In a population, the size of the labor force shrinks but a greater percentage of the labor force has a college degree. We can expect the human capital input to

A) be unaffected.
B) increase.
C) decrease.
D) first increase and then decrease.
E) increase or decrease depending on which change has a larger impact.

Question 24

In the Solow growth model, human capital measures

A) the number of workers.
B) the educational level of the workers.
C) the level of technology available to workers.
D) the labor input in terms of the physical number of workers and the knowledge and skills embodied in those workers.
E) how much firms spend to train workers.

Question 25

In the Solow growth model, human capital will increase if choose the best answer)

A) there are more workers.
B) workers are better educated.
C) there are more workers and existing workers become better educated and skilled.
D) real wages increase.
E) there is an increase in production.

Question 26

When firms buy new capital, it is called

A) investment.
B) net investment.
C) depreciation.
D) a steady state.
E) an unstable state.

Question 27

In a population, not all workers have a high school diploma. Suppose the size of the labor force increases but a smaller percentage of the labor force has a high school diploma. It is reasonable to expect that the larger labor force will the labor force with a high school diploma will______the human capital input and the smaller percentage of _____the human capital input.

A) decrease; increase
B) decrease; decrease
C) increase; decrease
D) increase; have no effect on
E) increase; increase

Question 28

Bob owns and manages an apple orchard. In Bob's business, an example of human capital would be

A) a ladder.
B) the time spent by the workers picking apples.
C) the apple trees.
D) the amount of fertilizer used on the trees.
E) the boxes used to store the apples.

Question 29

Human capital relates to _____and physical capital relates to______ .

A) people; buildings
B) firms; people
C) education; money
D) money; buildings
E) output; money

Question 30

The marginal product of an input is defined as the

A) change in output.
B) change in output divided by the change in input.
C) change in input.
D) total output divided by the total inputs.
E) cost of the input.

Question 31

Bob owns and manages an apple orchard. In Bob's business, an example of physical capital would be

A) a ladder.
B) the apple trees.
C) the water he uses on the trees.
D) the number of workers he hires to pick the apples.
E) Bob's level of education.

Question 32

The change in output divided by the change in input is defined as

A) marginal product.
B) average product.
C) diminishing returns.
D) labor productivity.
E) profit per unit output.

Question 33

Use the following graph to answer the next five questions.

If this country experiences an epidemic that reduces human capital, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there will be an upward movement along the production function.
D) there will be a downward movement along the production function.
E) there will be no effect on the production function.

Question 34

The Solow model emphasizes

A) the development of institutions.
B) capital and diminishing returns.
C) the importance of skilled labor.
D) technological change.
E) cultural factors.

Question 35

Country X has a higher growth rate of real investment than country Y. You might expect country X to have

A) a higher growth rate of real gross domestic product (GDP).
B) the same growth rate of real gross domestic product (GDP).
C) a lower growth rate of real gross domestic product (GDP).
D) a lower level of net investment.
E) a lower level of depreciation.

Question 36

Diminishing marginal product is also known as

A) diminishing returns.
B) net investment.
C) depreciation.
D) investment.
E) the steady state.

Question 37

Use the following graph to answer the next five questions.


-If capital is increasing, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there is an upward movement along the production function.
D) there is a downward movement along the production function.
E) there is an upward shift of the production function and an upward movement along the production function.

Question 38

Use the following graph to answer the next five questions.

If more natural resources are discovered, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there will be an upward movement along the production function.
D) there will be a downward movement along the production function.
E) there will be no effect on the production function.

Question 39

When the marginal product of an input falls as the quantity of the input rises, this is known as

A) diminishing marginal product.
B) diminishing output.
C) diminishing production.
D) decreasing returns to scale.
E) inverse marginal product.

Question 40

Use the following graph to answer the next five questions.

If net investment is positive, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there is an upward movement along the production function.
D) there is a downward movement along the production function.
E) there is an upward shift of the production function and an upward movement along the production function.

Question 41

Depreciation is

A) the wearing out of capital over time.
B) the reduction of investment over time.
C) the decline of output over time.
D) the tendency of economies to converge to the same output level.
E) what happens when technology does not advance.

Question 42

Use the following production function to answer the next four questions.

This production function exhibits diminishing returns to capital for

A) all units of capital after the first.
B) no units of capital.
C) all units of capital after the second.
D) all units of capital after the third.
E) all units of capital except the sixth.

Question 43

When ______units of capital are purchased, the marginal product will _____.

A) more; increase
B) more; not change
C) more; decrease
D) fewer; decrease
E) fewer; not change

Question 44

When moving up along the production function, the marginal product of capital will

A) increase.
B) decrease.
C) first decrease and then increase.
D) first increase and then remain constant.
E) remain constant.

Question 45

It is reasonable to expect that as the amount of physical capital is increased, the amount of output produced will

A) increase at a constant rate.
B) increase at a diminishing rate.
C) increase at an increasing rate.
D) decrease.
E) be unaffected.

Question 46

Use the following graph to answer the next two questions.


-The marginal product of the 5th unit of capital is_____ and the marginal product of the 10th unit is____ .

A) 100; 180
B) 100; 80
C) 10; 8
D) 20; 18
E) 20; 16

Question 47

As additional units of an input are employed, the marginal product of the input is

A) always increasing.
B) always decreasing.
C) constant.
D) eventually increasing.
E) eventually decreasing.

Question 48

Consider the following table that shows the number of trucks owned by a delivery firm and the corresponding number of deliveries made. Use the table to answer the next questions.
$$\begin{array} { l c } \hline \begin{array} { l } \text { Number of } \\\text { Trucks }\end{array} & \begin{array} { l } \text { Number of } \\\text { Deliveries }\end{array} \\\hline 0 & 1 \\1 & 20 \\2 & 30 \\3 & 36 \\4 & 38 \\5 & 38 \\\hline\end{array}$$


-When the firm bought their last truck, they found that the number of deliveries increased by 10. In this case, they must have just bought truck number

A) five.
B) four.
C) three.
D) one.
E) two.

Question 49

When the amount of physical capital is increased, then all else the same, the marginal product of capital will

A) increase.
B) decrease.
C) remain unchanged.
D) eventually decrease.
E) eventually increase.

Question 50

Use the following production function to answer the next four questions.

This production function exhibits

A) diminishing marginal product.
B) constant marginal product.
C) increasing marginal product.
D) increasing returns to capital.
E) a constant rate of depreciation.

Question 51

When the value of a resource declines over time, this is known as

A) depreciation.
B) the steady state.
C) diminishing returns.
D) diminishing marginal product.
E) net loss.

Question 52

There are diminishing returns to

A) only human capital.
B) only physical capital.
C) only natural resources.
D) only human capital and physical capital.
E) human capital, physical capital, and natural resources.

Question 53

The marginal product of an input is

A) always positive.
B) never positive.
C) usually positive.
D) always decreasing.
E) always increasing.

Question 54

Consider the following table that shows the number of trucks owned by a delivery firm and the corresponding number of deliveries made. Use the table to answer the next questions.
$$\begin{array} { l c } \hline \begin{array} { l } \text { Number of } \\\text { Trucks }\end{array} & \begin{array} { l } \text { Number of } \\\text { Deliveries }\end{array} \\\hline 0 & 1 \\1 & 20 \\2 & 30 \\3 & 36 \\4 & 38 \\5 & 38 \\\hline\end{array}$$


-The marginal product of the third truck is ______deliveries.

A) 12
B) 6
C) 36
D) 15
E) 2

Question 55

Consider the following table that shows the total number of acres plowed per hour as a function of the number of tractors used is increased. Use this table to answer the next questions.
$$\begin{array} { l c l } \hline \begin{array} { l } \text { Number of } \\\text { Tractors }\end{array} & \text { Total Acres } & \begin{array} { l } \text { Marginal } \\\text { Product }\end{array} \\\hline 0 & 50 & - \\1 & 200 & 150 \\2 & - & 120 \\3 & 420 & - \\4 & 480 & 60 \\5 & - & 20 \\\hline\end{array}$$


-The total acres plowed when two tractors are used is

A) 470.
B) 300.
C) 310.
D) 320.
E) 350.

Question 56

A key assumption of the Solow model is

A) increasing returns to labor and diminishing returns to capital.
B) diminishing returns to capital only.
C) diminishing marginal product of capital and labor.
D) diminishing marginal product of capital and increasing marginal product of labor.
E) constant marginal product of capital only.

Question 57

An economy is in a steady state if

A) depreciation is zero.
B) investment is zero.
C) net investment is positive.
D) capital and output are not changing.
E) there are diminishing returns.

Question 58

Use the following graph to answer the next two questions.


-The marginal product of the 15th unit of capital is

A) negative.
B) greater than the 10th unit.
C) the same as the 10th unit.
D) less than the 10th unit.
E) zero.

Question 59

Use the following production function to answer the next four questions.

How many units of capital should be produced in order to achieve the steady state?

A) 6
B) 5
C) 4
D) 3
E) There is not enough information to answer this question.

Question 60

Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of physical capital. All else the same, real gross domestic product GDP) will _____in the short run, and real GDP will_____ in the long run.

A) decline; be permanently lower
B) decline; return to the steady state level
C) be unchanged; decline
D) increase; decrease
E) decline; end up higher than the original level

Question 61

A firm has 50 computers. Every year, they buy 3 new ones and get rid of 3 old ones. In this case, investment is equal to ____and net investment is equal to ____.

A) 3; 3
B) 3; 0
C) 3; -3
D) 6; 3
E) 3; 6

Question 62

In the economy, the level of capital will remain the same if

A) net investment is zero.
B) investment is zero.
C) output is increasing.
D) net investment is greater than investment.
E) net investment is less than investment.

Question 63

An economy is in the steady state if

A) investment equals depreciation.
B) investment equals zero.
C) net investment equals depreciation.
D) capital grows at a constant rate.
E) there are no diminishing returns.

Question 64

When is net investment equal to investment?

A) never
B) only if depreciation is zero
C) always
D) if the economy is in a steady state
E) whenever the economy is not in a steady state

Question 65

When a firm buys a new computer____ increases, and when the firm gets rid of old computers _____decreases.

A) investment; investment
B) net investment; net investment
C) capital; capital
D) investment; depreciation
E) depreciation; investment

Question 66

In the economy, the level of capital will decrease if

A) the economy is not in a steady state.
B) depreciation is zero.
C) net investment is negative.
D) net investment is less than investment.
E) net investment is greater than investment.

Question 67

A company has three delivery trucks. Each month the trucks require repairs to keep them in good working order. Which of the following is true?

A) Investment is equal to zero.
B) Net investment is equal to zero.
C) The company is not in a steady state.
D) Capital is increasing.
E) Capital is decreasing.

Question 68

The economy tends to approach a steady state because

A) there is a shortage of skilled workers.
B) people run out of new ideas.
C) there are diminishing returns.
D) government policies inhibit further growth.
E) there is depreciation.

Question 69

If an economy is in the steady state, then

A) net investment is zero.
B) depreciation is zero.
C) investment is zero.
D) the marginal product of capital is zero.
E) there are no diminishing returns.

Question 70

Suppose that in the economy the level of capital is 500 units, the depreciation rate is 4 percent, and the level of investment is 20 units. In this case,

A) net investment is negative.
B) net investment is positive.
C) the level of output will decrease.
D) the level of capital will increase.
E) the economy is in a steady state.

Question 71

A lawn service company has 20 lawn mowers. This year they buy 3 new ones and get rid of 2 old ones. In this case, investment is equal to____ and net investment is equal to____ .

A) 3; 3
B) 3; 1
C) 3; 2
D) 5; 3
E) 3; 5

Question 72

In the economy, the level of capital will increase if

A) depreciation is zero.
B) investment is positive.
C) investment is larger than net investment.
D) net investment is larger than investment.
E) net investment is positive.

Question 73

Suppose that the level of capital in the economy is 200 units, the depreciation rate is 10 percent, and the level of investment is equal to 10 units. In this case,

A) the economy is in a steady state.
B) investment is less than net investment.
C) investment is equal to net investment.
D) investment is greater than net investment.
E) the level of output will increase.

Question 74

A firm has 100 computers, and each year 5 of them become obsolete and must be recycled. This firm is in a steady state if investment each year is equal to

A) 0.
B) 5.
C) 1.
D) 100.
E) 95.

Question 75

As a country approaches the steady state, the returns to capital

A) increase.
B) decrease.
C) turn negative.
D) become equal to zero.
E) are unaffected.

Question 76

Suppose that the level of capital in the economy is 100 units, the depreciation rate is 5 percent, and investment is equal to 10 units. In this case,

A) the level of capital will increase.
B) the economy is in a steady state.
C) the level of capital will decrease.
D) the level of output will decrease.
E) investment is less than net investment.

Question 77

Suppose a major hurricane hits the eastern coast of Florida and destroys significant amounts of physical capital. Considering the production function that illustrates the relationship between real GDP and capital, in the long run, you would expect that

A) the production function will have shifted upward.
B) the production function will have shifted downward.
C) the production function will have shifted back to its original position after having shifted downward in the short run.
D) there has been a permanent downward movement along the production function.
E) there has been no effect on the production function and real gross domestic product GDP) returns to the steady state level.

Question 78

According to the Solow growth model, advanced economies with large stocks of capital will

A) eventually stop growing.
B) continue to grow at a constant rate.
C) always have levels of real gross domestic product GDP) that are higher than the less advanced economies.
D) all converge to the same level of real gross domestic product GDP).
E) never reach a steady state.

Question 79

A firm has a total of 25 workstations in four different office buildings. This year it builds 3 new workstations and gets rid of 5 old ones. In this case, investment is equal to____ and net investment is equal to_____ .

A) 3; 5
B) 3; -2
C) 3; 2
D) 2; -2
E) 5; 3

Question 80

As a nation approaches its steady state, the returns to capital_____ and the growth of real gross domestic product (GDP)_____ .

A) increase; increases
B) decrease; slows down
C) increase; slows down
D) decrease; increases
E) remain unchanged; remains unchanged