Deck 8: Application: The Costs of Taxation

Question 1

With population growth at rate n and labor-augmenting technological progress at rate g, the Golden Rule steady state requires that the marginal product of capital (MPK):

A)net of depreciation be equal to n + g.
B)net of depreciation be equal to the depreciation rate plus n + g.
C)plus n be equal to the depreciation rate plus g.
D)plus g be equal to the depreciation rate plus n.

Answer 1

A

Question 2

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, output per effective worker grows at a percent rate.

A)0
B)2
C)3
D)5

Answer 2

A

Question 3

In a steady-state economy with population growth n and labor-augmenting technological progress g, persistent increases in standard of living are possible because the:

A)capital stock grows faster than does the labor force.
B)capital stock grows faster than does the number of effective workers.
C)capital stock grows faster than does depreciation.
D)saving rate constantly increases.

Answer 3

A

Question 4

The efficiency of labor is a term that does not reflect the:

A)high output that comes from labor cooperating with a large amount of capital.
B)health of the labor force.
C)education of the labor force.
D)skills of the labor force acquired through on-the-job training.

Question 5

The rate of labor-augmenting technological progress (g) is the growth rate of:

A)labor.
B)the efficiency of labor.
C)capital.
D)output.

Question 6

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, output per actual worker grows at a percent rate.

A)0
B)2
C)3
D)5

Question 7

If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then the number of effective workers is growing at a rate of:

A)2 percent.
B)3 percent.
C)5 percent.
D)6 percent.

Question 8

According to the Solow model, persistently rising living standards can only be explained by:

A)population growth.
B)capital accumulation.
C)saving rates.
D)technological progress.

Question 9

In the Solow model with technological progress, the steady-state growth rate of capital per effective worker is:

A)0.
B)g.
C)n.
D)n + g.

Question 10

In the Solow growth model with population growth and technological change, the break-even level of investment must cover:

A)depreciating capital.
B)depreciating capital and capital for new workers.
C)depreciating capital and capital for new effective workers.
D)depreciating capital, capital for new workers, and capital for new effective workers.

Question 11

Over the past 50 years in the United States:

A)output per worker hour, capital stock per worker hour, the real wage, and the real rental price of capital have all increased about 2 percent per year.
B)output per worker hour, the real wage, and the real rental price of capital have all increased about 2 percent per year, whereas capital stock per worker hour has increased faster.
C)output per worker hour and the real wage have both increased about 2 percent per year, whereas capital stock per worker hour has increased faster and the real rental price of capital has remained about the same.
D)output per worker hour, the real wage, and capital stock per worker hour have all increased about 2 percent per year, whereas the real rental price of capital has remained about the same.

Question 12

In the Solow growth model with population growth and technological change, the steady-state growth rate of income per person depends on:

A)the rate of population growth.
B)the saving rate.
C)the rate of technological progress.
D)the rate of population growth plus the rate of technological progress.

Question 13

Assuming that technological progress increases the efficiency of labor at a constant rate is called:

A)endogenous technological progress.
B)the efficiency-wage model of economic growth.
C)labor-augmenting technological progress.
D)the Golden Rule model of economic growth.

Question 14

In the Solow model with technological progress, the steady-state growth rate of output per effective worker is:

A)0.
B)g.
C)n.
D)n + g.

Question 15

In the Solow model with technological progress, the steady-state growth rate of total output is:

A)0.
B)g.
C)n.
D)n + g.

Question 16

In the Solow growth model, the steady-state growth rate of output per effective worker is , and the steady-state growth rate of output per actual worker is .

A)the sum of the rate of technological progress plus the rate of population growth; zero
B)zero; the rate of technological progress
C)zero; zero
D)the rate of technological progress; the rate of population growth

Question 17

In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:

A)output per worker.
B)output per effective worker.
C)consumption per worker.
D)consumption per effective worker.

Question 18

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, total output grows at a percent rate.

A)0
B)2
C)3
D)5

Question 19

In the Solow model with technological progress, the steady-state growth rate of output per (actual) worker is:

A)0.
B)g.
C)n.
D)n + g.

Question 20

The efficiency of labor:

A)is the marginal product of labor.
B)is the rate of growth of the labor force.
C)includes the knowledge, health, and skills of labor.
D)equals output per worker.

Question 21

In year 1, capital stock was 6, labor input was 3, and output was 12. In year 2, capital was 7, labor was 4, and output was 14. If shares of labor and capital were each 1/2, between the two years, total factor productivity:

A)increased by 1/12.
B)increased by 1/18.
C)decreased by 1/12.
D)decreased by 1/18.

Question 22

Based on the Solow growth model with population growth and labor-augmenting technological progress, explain how each of the following policies would affect the steady-state level and steady-state growth rate of total output per person:
a. a reduction in the government's budget deficit b. grants to support research and development c. tax incentives to increase private saving
d. greater protection of private property rights

Question 23

a. What is the Solow residual?
b. Compare Prescott's interpretation of the fluctuations of the Solow residual over the business cycle with more standard explanations of these fluctuations.

Question 24

Explain how the Solow growth model differs from models of endogenous growth with respect to:
a. the sources of technological progress. b. returns to capital.

Question 25

The Solow model predicts that two economies will converge if the economies start with the same:

A)capital stocks.
B)populations.
C)steady states.
D)production functions.

Question 26

Suppose that technological change is not labor-augmenting, but affects only capital. Use the Solow growth model of
Chapter 8 to graphically illustrate the impact of the slower rate of technological change that increases the rate at
which capital wears out (the rate of depreciation increases) on the steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction the curves shift.

Question 27

Suppose a government is able to permanently reduce its budget deficit. Use the Solow growth model of Chapter 8 to graphically illustrate the impact of a permanent government deficit reduction on the steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction the curves shift.

Question 28

In the Solow model with technological progress, by increasing the efficiency of labor at rate g:

A)the real wage and the real rental price of capital both grow at rate g.
B)the real wage grows at rate g but the real rental price of capital is constant.
C)the real wage is constant but the real rental price of capital grows at rate g.
D)both the real wage and the real rental price of capital are constant.

Question 29

If the per-worker production function is y = Ak, where A is a positive constant, in the steady state, a:

A)lower saving rate does not affect the growth rate.
B)higher saving rate does not affect the growth rate.
C)lower saving rate leads to a higher growth rate.
D)higher saving rate leads to a higher growth rate.

Question 30

Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3 percent, labor growing at 1 percent, and technological progress growing at 2 percent. The capital share is 0.3. The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:

A)0 percent, 1 percent, and 2 percent, respectively.
B)0.3 percent, 0.7 percent, and 2 percent, respectively.
C)0.9 percent, 0.7 percent, and 1.4 percent, respectively.
D)1.8 percent, 0.3 percent, and 0.9 percent, respectively.

Question 31

The economy of Macroland can be described by the Solow growth model. In Macroland the labor force grows at 3 percent per year, labor-augmenting technology increases at 2 percent per year, the saving rate is 15 percent per year, and the rate of capital depreciation is 10 percent per year. Choosing from among the following variables: output per effective worker, output per worker, total output, labor force, capital per worker, and capital per effective worker, which variables will be growing at a:
a.2 percent rate? b.3 percent rate? c.5 percent rate? d.0 percent rate?

Question 32

Suppose Congress passes significant tax cuts on household income but does not reduce spending, so that the government budget deficit is larger. Use the Solow growth model of Chapter 8 to graphically illustrate the impact of the tax cut on the steady-state capital-labor ratio and the steady-state level of output per worker. Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction the curves shift.

Question 33

Two countries, Highland and Lowland, are described by the Solow growth model. Both countries are identical, except that the rate of labor-augmenting technological progress is higher in Highland than in Lowland.
a. In which country is the steady-state growth rate of output per effective worker higher?
b. In which country is the steady-state growth rate of total output higher?
c. Does the Solow growth model predict that the two economies will converge to the same steady state?

Question 34

The rate of growth of labor productivity (Y/L) may be expressed as the rate of growth of total factor productivity:

A)plus the capital share multiplied by the rate of growth of the capital-labor ratio.
B)minus the capital share multiplied by the rate of growth of the capital-labor ratio.
C)plus the rate of growth of capital productivity.
D)minus the rate of growth of capital productivity.

Question 35

Suppose a government is able to impose controls that limit the number of children people can have. Use the Solow growth model of Chapter 8 to graphically illustrate the impact of the slower rate of population growth on the
steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction the curves shift.