Deck 8: Long-Run Economic Growth

Question 1

Describe the relationship between the production function,the investment function,and the capital-labour ratio.

Answer 1

Financial markets operate to ensure that the level of savings equals the level of investment.For simplicity,we assume that the economy saves a constant fraction,s,of real GDP per worker,y.So,investment per worker,i,equals sy.As the capital-labour ratio increases,real GDP per worker also increases,which causes investment per worker to increase.Due to diminishing marginal returns,increasing the capital-labour ratio causes smaller and smaller increases in real GDP per worker,so the production function becomes flatter.Because investment per worker equals the saving rate multiplied by real GDP per worker,sy,the increase in investment also gets smaller and smaller as the capital-labour ratio increases.

Question 2

An increase in the level of total factor productivity will lead to

A) an increase in the capital-labour ratio and an increase in real GDP per worker.
B) an increase in investment and a decrease in depreciation.
C) an upward shift of the break-even investment line and an increase in the capital-labour ratio.
D) a higher rate of dilution and lower break-even investment.

Answer 2

A

Question 3

In the Solow growth model,a change in the capital-labour ratio is equal to

A) (saving - investment).
B) saving + depreciation).
C) (investment - depreciation).
D) (capital stock - labour force).

Answer 3

C

Question 4

As the capital-labour ratio increases,real GDP per worker ________,and investment per worker ________.

A) increases; decreases
B) decreases; increases
C) increases; increases
D) decreases; decreases

Question 5

An economy accumulates capital when

A) its capital-labour ratio increases.
B) it increases the number of workers.
C) GDP per capita increases.
D) labour productivity declines.

Question 6

By comparing ________ and ________,we will be able to determine what happens with capital stock over time.

A) investment; spending
B) consumption; spending
C) investment; depreciation
D) consumption; depreciation

Question 7

In the Solow growth model,the steady state occurs when

A) investment = depreciation.
B) depreciation = 0.
C) the capital-labour ratio = 1.
D) saving = investment.

Question 8

Suppose y = k¹/²,total factor productivity is constant and equal to 1,s = 0.40,and d = 0.10.When the economy reaches the steady state,the capital-labour ratio is ________ of capital per worker.

A) $2
B) $4
C) $8
D) $16

Question 9

As the capital-labour ratio increases,investment per worker

A) increases at an increasing rate.
B) decreases at a constant rate.
C) increases at a decreasing rate.
D) decreases at an increasing rate.

Question 10

Suppose y = k¹/²,total factor productivity is constant and equal to 1,s = 0.40,and d = 0.10.When the economy reaches the steady state,consumption per worker is ________.

A) $1.20
B) $2.40
C) $4.80
D) $13.60

Question 11

To analyze the Solow growth model,we make the simplifying assumption that

A) the capital-labour ratio remains constant.
B) the economy is open.
C) the ratio of workers to the population is constant.
D) households save an increasing portion of their income.

Question 12

Suppose y = k¹/²,total factor productivity is constant and equal to 1,s = 0.40,and d = 0.10.When the economy reaches the steady state,real GDP per worker is ________.

A) $2
B) $4
C) $8
D) $16

Question 13

In the Solow growth model,if the level of investment is greater than depreciation at the initial capital-labour ratio,then △k is ________,and the capital-labour ratio ________ toward the steady-state capital-labour ratio.

A) greater than zero; increases
B) greater than zero; decreases
C) less than zero; increases
D) less than zero; decreases

Question 14

In the Solow growth model,if the level of investment is less than depreciation at the initial capital-labour ratio,then △k is ________ and the capital-labour ratio ________ toward the steady-state capital-labour ratio.

A) greater than zero; increases
B) greater than zero; decreases
C) less than zero; increases
D) less than zero; decreases

Question 15

Suppose k = y¹/²,total factor productivity is constant and equal to 1,s = 0.40,and d = 0.10.When the economy reaches the steady state,investment per worker is ________.

A) $0.80
B) $1.60
C) $3.20
D) $6.40

Question 16

Keeping total factor productivity constant,as the capital-labour ratio increases,labour productivity

A) increases at a constant rate.
B) increases at an increasing rate.
C) increases at a decreasing rate.
D) does not change.

Question 17

Assume the capital-labour ratio remains constant.If investment increases at a constant rate,real GDP per worker will increase ________,and if total factor productivity increases at a constant rate,real GDP per worker will increase ________.

A) at an increasing rate; at an increasing rate
B) at a constant rate; at an increasing rate
C) at a constant rate; at a decreasing rate
D) at a decreasing rate; at a constant rate

Question 18

In the steady state in the Solow growth model,the economy is in equilibrium with the capital-labour ratio and real GDP per worker ________,and with capital,labour,and real GDP ________.

A) constant; constant
B) growing; constant
C) constant; growing
D) growing; growing

Question 19

The rate at which the capital stock declines due to either capital goods becoming worn out by use or becoming obsolete is called the

A) amortization rate.
B) terminal rate.
C) depreciation rate.
D) steady state rate.

Question 20

The critical determinant of real GDP per capita is

A) the size of the labour force.
B) labour productivity.
C) the population.
D) the size of the working-age population.

Question 21

If the capital-labour ratio equals 1.5 in the steady state,depreciation equals 20,and dilution equals 10,investment per worker equals

A) 15.
B) 20.
C) 30.
D) 45.

Question 22

Figure 8.2

Refer to Figure 8.2.Suppose the economy is originally in steady state at k*₂.All else equal,if the labour force growth rate increases,the change in the capital-labour ratio is represented by the vertical distance between

A) sf(k) and (d + n₂)k.
B) sf(k) and (d + n₁)k.
C) (d + n₁)k and (d + n₂)k.
D) k*₂ and (d + n₂)k.

Question 23

Figure 8.1

Refer to Figure 8.1.Suppose the economy is originally in steady state at k*₁.If the saving rate increases from s₁ to s₂,the capital-labour ratio will begin to ________,and real GDP per worker will ________.

A) rise; rise
B) rise, fall
C) fall, fall
D) fall; rise

Question 24

What is depreciation,and what happens to the depreciation line when the rate of depreciation increases or decreases?

Question 25

If the saving rate increases,break-even investment will be ________ than investment,and GDP per worker will ________.

A) greater; increase
B) greater; decrease
C) less; increase
D) less; decrease

Question 26

If the capital-labour ratio is below the steady-state value,investment is ________ than break-even investment,and the capital-labour ratio ________.

A) greater; increases
B) greater; decreases
C) less; increases
D) less; decreases

Question 27

Figure 8.2

Refer to Figure 8.2.Suppose the economy is originally in steady state at k*₁.All else equal,if the labour force growth rate decreases,

A) break-even investment will shift from (d + n₁)k to (d + n₂)k, and the capital-labour ratio will move from k*₁ to k*₂.
B) break-even investment will shift from (d + n₁)k to (d + n₂)k, and the capital-labour ratio will remain at k*₁.
C) break-even investment will shift from (d + n₂)k to (d + n₁)k, and the capital-labour ratio will move from k*₁ to k*₂.
D) break-even investment will shift from (d + n₂)k to (d + n₁)k, and the capital-labour ratio will remain at k*₁.

Question 28

Figure 8.2

Refer to Figure 8.2.Suppose the economy is originally in steady state at k*₁.All else equal,if the labour force growth rate decreases,the change in the capital-labour ratio is represented by the vertical distance between

A) sf(k) and (d + n₂)k.
B) sf(k) and (d + n₁)k.
C) (d + n₁)k and (d + n₂)k.
D) k*₂ and (d + n₂)k.

Question 29

Suppose k = y¹/⁴,total factor productivity is constant and equal to 1,s = 0.40,and d = 0.05.
a. Find the steady-state capital-labour ratio for this economy.
b. Find the steady-state real GDP per worker for this economy.
c. Find the steady-state level of investment per worker for this economy.
d. Find the steady-state level of consumption per worker for this economy.

Question 30

The break-even investment line becomes flatter when the depreciation growth rate ________ or the labour force growth rate ________.

A) increases; decreases
B) increases; increases
C) decreases; increases
D) decreases; decreases

Question 31

If d = the depreciation rate,n = the growth rate of the labour force,and k = the capital-labour ratio,which of the following expressions best describes break-even investment?

A) dnk
B) (d - n)/k
C) dk - nk
D) (d + n)k

Question 32

Describe the steady state in the Solow growth model.

Question 33

Figure 8.2

Refer to Figure 8.2.Suppose the economy is originally in steady state at k*₂.All else equal,if the labour force growth rate increases ,

A) break-even investment will shift from (d + n₁)k to (d + n₂)k, and the capital-labour ratio will move from k*₂ to k*₁.
B) break-even investment will shift from (d + n₁)k to (d + n₂)k, and the capital-labour ratio will remain at k*₂.
C) break-even investment will shift from (d + n₂)k to (d + n₁)k, and the capital-labour ratio will move from k*₂ to k*₁.
D) break-even investment will shift from (d + n₂)k to (d + n₁)k, and the capital-labour ratio will remain at k*₂.

Question 34

The level of investment necessary to keep the capital-labour ratio constant is called

A) capital investment.
B) break-even investment.
C) depreciated investment.
D) diluted investment.

Question 35

Figure 8.1

Refer to Figure 8.1.Suppose the economy is originally in steady state at k*₁.If the saving rate increases from s₁ to s₂,

A) depreciation becomes greater than investment.
B) investment becomes greater than depreciation.
C) investment becomes greater than saving.
D) saving becomes greater than investment.

Question 36

The break-even investment line becomes steeper when the depreciation growth rate ________ or the labour force growth rate ________.

A) increases; decreases
B) increases; increases
C) decreases; increases
D) decreases; decreases

Question 37

When break-even investment is subtracted from investment per worker,the result is

A) the change in the capital-labour ratio.
B) saving.
C) the steady state.
D) capital stock dilution.

Question 38

If the saving rate decreases,break-even investment will be ________ than investment,and the capital-labour ratio will ________.

A) greater; increase
B) greater; decrease
C) less; increase
D) less; decrease

Question 39

If the capital-labour ratio equals 1.5 in the steady state,depreciation equals 20,and dilution equals 10,break-even investment equals

A) 15.
B) 20.
C) 30.
D) 45.

Question 40

As the capital-labour ratio increases,break-even investment

A) increases at a decreasing rate.
B) increases at an increasing rate.
C) increases at a constant rate.
D) remains unchanged.

Question 41

The labour input in the production function can increase

A) only if the number of workers increases.
B) only if the efficiency of the existing workers improves.
C) if the number of workers increases and/or the efficiency of the existing workers improves.
D) only if both the number of workers increases and the efficiency of the existing workers improves.

Question 42

Labour-augmenting technological change refers to improvements in efficiency that

A) occur without increasing the productivity of labour or the efficiency of capital goods.
B) increase the productivity of labour and the efficiency of capital goods.
C) increase the efficiency of capital goods without having to increase the productivity of labour.
D) increase the productivity of labour but that do not directly make capital goods more efficient.

Question 43

A nation's growth rate will most likely ________ as it converges to a new,higher balanced growth path.

A) speed up
B) slow down
C) maintain its current pace
D) become negative

Question 44

The Solow growth model predicts that a lower labour force growth rate will lead to

A) a decreased steady state and higher break-even investment.
B) higher productivity and a higher standard of living.
C) a lower saving rate and decreased investment.
D) a higher rate of dilution and lower break-even investment.

Question 45

Countries that have experienced sustained increases in their standard of living have achieved them because of

A) higher rates of saving and investment.
B) higher rates of population growth.
C) sustained technological change.
D) All of the above are correct.

Question 46

The nation of Futura has an actual capital-labour ratio that is in steady state.Futura will experience

A) no growth from convergence and the economy will remain on its balanced growth path.
B) positive growth from convergence to keep the economy on its balanced growth path.
C) positive growth from convergence, but the growth will be less than the balanced growth rate in order to remain on its balanced growth path.
D) negative growth from convergence to offset the increase in the balanced growth rate in order to remain on its balanced growth path.

Question 47

Which expression best represents the break-even level of investment when incorporating labour-augmenting technological change into the Solow growth model?

A) (d + n + g)k
B) (d + n)k
C) (d + n ) / (k + g)
D) (d + n + k) / (gk)

Question 48

Changes in the saving rate,labour-force growth rate,and depreciation rate will ________ the steady-state level of real GDP per capita and will ________ the steady-state growth rate.

A) affect; affect
B) affect; not affect
C) not affect; affect
D) not affect; not affect

Question 49

What is break-even investment,and what happens to the break-even level of investment when the growth rate of the labour force either increases or decreases?

Question 50

How will each of the following affect the steady-state growth rate of the standard of living? Assume the economy is currently in the steady state.
a. an increase in the depreciation rate
b. an increase in the growth rate of labour-augmenting technological change
c. a decrease in the saving rate
d. a decrease in the labour-force growth rate

Question 51

What is the difference between real GDP per worker and real GDP per effective worker?

Question 52

Since the late 1970s,China's growth rate in real GDP per capita has been more than 3.5 times higher than that in Canada.Much of China's growth is likely due to the transition from a communist economy to a market economy.This transition is equivalent to

A) moving China's balanced growth path higher.
B) returning China to its original balanced growth path.
C) increasing China's balanced growth path to a level 3.5 times greater than the balanced growth path in Canada.
D) reducing China's balanced growth path to compensate for the increase in real GDP per capita.

Question 53

When incorporating labour-augmenting technological change into the Solow growth model,the focus is on

A) capital per worker and output per worker.
B) capital per effective worker and output per worker.
C) capital per worker and output per effective worker.
D) capital per effective worker and output per effective worker.

Question 54

Devastating damage resulting from a major earthquake and tsunami will most likely

A) initially move a country to a time path beneath its balanced growth path.
B) move a country to a lower point on its balanced growth path.
C) shift the balanced growth path for a country to a new, lower level.
D) have little to no impact on the short-term growth rate in a country.

Question 55

In the steady state,assuming that a constant share of the population is working,

A) both real GDP per worker and real GDP per capita will grow at the same rate.
B) real GDP per worker will grow at a faster rate than real GDP per capita.
C) real GDP per capita will grow at a faster rate than real GDP per worker.
D) both real GDP per worker and real GDP per capita will remain constant.

Question 56

If the actual capital-labour ratio is below the steady-state capital-labour ratio,growth from convergence will be ________,and the economy will grow ________ than it will along a balanced growth path.

A) negative; slower
B) negative; faster
C) positive; slower
D) positive; faster

Question 57

If the actual capital-labour ratio is above the steady-state capital-labour ratio,growth from convergence will be ________,and the economy will grow ________ than it will along a balanced growth path.

A) negative; slower
B) negative; faster
C) positive; slower
D) positive; faster

Question 58

Balanced growth occurs when

A) the economy is in steady state.
B) the growth rates for the capital-labour ratio and real GDP per worker are the same.
C) total factor productivity and capital accumulation each account for the same amount of growth in labour productivity.
D) nations converge to the same level of real GDP per worker from equal increases in total factor productivity.

Question 59

Suppose the nation of Atlantica is experiencing a decline in population growth,while the nation of Pacifica is experiencing an increase in population growth.These changes in population growth rates are having a direct impact on changes in the growth rate of the labour force in each nation.What effect will these changes have on the capital-labour ratio and the standard of living in each nation? Use a graph to show how these changes influence the Solow growth model.

Question 60

In the steady state,real GDP per worker ________,and real GDP per effective worker ________.

A) will grow; will grow
B) will grow; is constant
C) is constant; will grow
D) is constant; is constant

Question 61

According to the AK growth model,budget surpluses ________ the national saving rate and ________ the steady-state growth rate.

A) increase; increase
B) reduce; reduce
C) increase; do not change
D) reduce; do not change

Question 62

The idea that additional spending on research and development will produce additional knowledge that may further increase the productivity of capital is an argument used by some economists to claim that knowledge is subject to ________ returns.

A) decreasing
B) increasing
C) constant
D) negative

Question 63

According to the AK growth model,increasing human capital will ________ the steady-state growth rate.

A) decrease
B) increase
C) not change
D) either increase or decrease

Question 64

Explain how an economy that is presently above its balanced growth path will converge back to its balanced growth path.

Question 65

In the two-sector growth models,endogenous growth arises from

A) increased saving.
B) the research sector.
C) increased capital.
D) the manufacturing sector.

Question 66

When an economy is on the balanced growth path,the growth rate of real GDP per capita is determined by the growth rate of

A) convergence.
B) capital accumulation.
C) total factor productivity.
D) the labour force.

Question 67

In the Solow growth model,the growth rate of real GDP per worker depends on the ________,and in the AK growth model,the growth rate of real GDP per worker depends on the ________.

A) rate of depreciation; rate of dilution
B) investment growth; rate of population growth
C) growth rate of the capital stock; growth rate of the labour force
D) rate of labour-augmenting technological change; national saving rate

Question 68

Government policies that reduce the price of education increase ________ in the AK growth models or increase ________ in the production function for new ideas in the two-sector growth model.

A) the capital stock; the productivity of researchers
B) the efficiency index; the size of the labour force
C) the proportion of the labour force devoted to research; the capital stock
D) the productivity of researchers; the size of the labour force

Question 69

In the two-sector growth models,the size of the labour force,the proportion of the labour force devoted to research,and the productivity of researchers determine the

A) investment necessary for steady-state growth.
B) steady-state capital stock.
C) growth rate of labour-augmenting technological change.
D) human capital stock.

Question 70

Endogenous growth theory tries to explain why

A) the growth rate of technological change varies across countries.
B) capital is not subject to diminishing marginal returns.
C) total factor productivity is the only determinant of labour productivity.
D) balanced growth occurs in all economies.

Question 71

Balanced growth paths can differ across countries due to differences in saving rates,labour force growth rates,and the rates of labour-augmenting technological change.These differences are likely to result in differences in ________,a common measure of the standard of living.

A) happiness
B) life expectancy
C) income distribution
D) real GDP per capita

Question 72

Using AK growth models and assuming that the labour force is fixed at the value of 1,

A) real GDP per worker is greater than real GDP per capita.
B) real GDP per capita is less than real GDP.
C) real GDP is greater than real GDP per worker and real GDP per capita.
D) there is essentially no difference in real GDP, real GDP per worker, and real GDP per capita.

Question 73

Why does growth occur in two-sector growth models?

Question 74

Over half of the increase in labour productivity in India since 1993 has been due to

A) the growth rate of the capital stock.
B) total factor productivity growth.
C) a decrease in the population.
D) successful infrastructure investment.

Question 75

Over time,nations tend to converge to

A) the same balanced growth path and same income per capita.
B) the same balanced growth path but varying income per capita.
C) different balanced growth paths but the same income per capita.
D) different balanced growth paths because of varying income per capita.

Question 76

The AK growth model indicates that countries with high saving rates experience ________,and countries with low saving rates experience ________.

A) high growth rates; low growth rates
B) low growth rates; high growth rates
C) positive growth rates; no growth
D) negative growth rates; positive growth rates

Question 77

What effect would each of the following government actions have on the steady-state growth rate of the standard of living?
a. a decrease in income tax rates
b. a growing budget deficit
c. an increase in funding for research and development at public universities

Question 78

AK growth models argue that which type or types of capital may not be subject to diminishing returns?

A) only physical capital
B) physical capital and human capital
C) human capital and knowledge
D) knowledge and physical capital

Question 79

Explain why GDP per capita varies among countries even though countries eventually converge to their balanced growth paths.

Question 80

In the production function for new ideas and technology in ________,a decrease in the labour force will ________ the growth rate of technological change.

A) the AK growth models; decrease
B) the AK growth models; increase
C) the two-sector growth model; decrease
D) the two-sector growth model; increase