Deck 6: Long-Run Economic Growth

Question 1

Suppose the current level of output is 5000, and the elasticity of output with respect to capital is 0.4. A 10% increase in capital would increase the current level of output to

A) 5020.
B) 5050.
C) 5200.
D) 5500.

Answer 1

C

Question 2

Over the past year, output grew 6%, capital grew 2%, and labour grew 4%. If the elasticities of output with respect to capital and labour are 0.3 and 0.7 respectively, how much did productivity grow?

A) 2.0%
B) 2.6%
C) 3.0%
D) 3.3%

Answer 2

B

Question 3

Over the past year, output grew 3%, capital grew 4%, and labour grew 3%. If the elasticities of output with respect to capital and labour are 0.3 and 0.7 respectively, how much did productivity grow?

A) -0.6%
B) -0.3%
C) 0.0%
D) 0.3%

Answer 3

B

Question 4

Harvey Lithwick found that labour's contribution to output growth in Canada since 1891 was attributable to all the factors below except

A) rising population.
B) an increase in the percentage of the population in the labour force.
C) an increase in the number of hours worked per person.
D) higher educational levels.

Question 5

The major source of economic growth is

A) capital.
B) labour.
C) technology.
D) all of the above.

Question 6

Suppose the rate of economic growth in Mainland was 25 percent, Capital growth 30 percent, and labour growth 20 percent. If labour contribution to economic growth is 14 percent, how much is the elasticity of output with respect to labour?

A) 0.3
B) 0.7
C) 0.5
D) 0.8

Question 7

Growth accounting equation

A) measures empirically the relative importance of the sources of output growth.
B) is the production function written in growth rate form.
C) is used to calculate the total factor productivity.
D) all of the above.

Question 8

An economy's output of goods and services depends on all of the following except

A) the quantity of capital input.
B) the quantity of labour input.
C) the productivity of inputs.
D) the interest rate.

Question 9

Suppose the current level of output is 5000, and the elasticity of output with respect to labour is 0.7. A 10% increase in labour would increase the current level of output to

A) 5035.
B) 5070.
C) 5350.
D) 5700.

Question 10

Suppose the rate of economic growth in Mainland was 25 percent, Capital growth 30 percent, and labour growth 20 percent. If the elasticities output with respect to capital and labour are 0.3 and 0.7 respectively, how much is the labour contribution to economic growth?

A) 2 percent
B) 6 percent
C) 9 percent
D) 14 percent

Question 11

Analysis of the Canadian economy found that

A) total factor productivity was the largest source of economic growth since 1948.
B) the contribution of labour growth has been more variable than the contribution of capital growth.
C) productivity growth has been positive over any period of more than five years since World War II.
D) the contribution of labour growth has been greater than the contribution of capital growth.

Question 12

Suppose the rate of economic growth in Mainland was 25 percent, Capital growth 30 percent, and labour growth 20 percent. If the elasticities output with respect to capital and labour are 0.3 and 0.7 respectively, how much is the productivity growth?

A) 2 percent
B) 6 percent
C) 9 percent
D) 14 percent

Question 13

Suppose the current level of output is 5000. If the elasticities of output with respect to capital and labour are 0.3 and 0.7 respectively, a 10% increase in capital combined with a 5% increase in labour and a 5% increase in productivity would increase the current level of output to

A) 5015.
B) 5325.
C) 5575.
D) 6000.

Question 14

Suppose the current lever of output is 5000. A 10% increase in productivity would increase the current level of output to

A) 5050.
B) 5100.
C) 5500.
D) 6000.

Question 15

Total factor productivity growth is that part of economic growth due to

A) capital growth plus labour growth.
B) capital growth less labour growth.
C) capital growth times labour growth.
D) neither capital growth nor labour growth.

Question 16

Suppose the rate of economic growth in Mainland was 25 percent, Capital growth 30 percent, and labour growth 20 percent. If the elasticities output with respect to capital and labour are 0.3 and 0.7 respectively, how much is the capital contribution to economic growth?

A) 2 percent
B) 6 percent
C) 9 percent
D) 14 percent

Question 17

The elasticity of output with respect to capital

A) is the increase in output resulting from an increase in the capital stock.
B) is the percentage increase in output resulting from a one percent increase in the capital stock.
C) is always greater than one.
D) is the inverse of the elasticity of output with respect to labour.

Question 18

Suppose the current level of output is 5000. If the elasticities of output with respect to capital and labour are 0.3 and 0.7 respectively, a 10% increase in capital combined with a 5% increase in labour would increase the current level of output to

A) 5015.
B) 5325.
C) 5600.
D) 5650.

Question 19

From 1982 to 1992 North Samaria's economy grew at an annual rate of 3.5%, but from 1992 to 2002 North Samaria's economy grew by only 1% per year. In 1992 Samaria's per capita income was $8000. How much higher would North Samaria's per capita income have been in 2002 if growth from 1992 to 2002 had been 3.5% rather than 1%?

A) $2241
B) $2448
C) $2508
D) $3285

Question 20

Suppose the rate of economic growth in Mainland was 25 percent, Capital growth 30 percent, and labour growth 20 percent. If capital contribution to economic growth is 9 percent, how much is the elasticity of output with respect to capital?

A) 0.3
B) 0.7
C) 0.5
D) 0.8

Question 21

If f(k) = 6k^0.5, s = 0.1, n = 0.1, and d = 0.2, what is the value of k at equilibrium?

A) 1
B) 2
C) 3
D) 4

Question 22

In the absence of productivity growth, in a steady-state economy

A) output per worker and consumption per worker remain constant over time.
B) output per worker remains constant over time, but consumption per worker grows over time.
C) output per worker grows over time, but consumption per worker remains constant over time.
D) output per worker and consumption per worker both grow overtime.

Question 23

The idea that saving equals investment in the Solow model means that a steady state can be reached only when

A) s = k.
B) s = n + d.
C) sf(k) = (s + d)k.
D) sf(k) = (n + d)k.

Question 24

The bowed shape of the per-worker production function is caused by

A) wealth effects that reduce labour supply.
B) diminishing marginal productivity of capital.
C) increasing marginal productivity of labour.
D) increasing marginal productivity of capital.

Question 25

Steady-state investment per worker is positively related to the capital-labour ratio because the higher the capital-labour ratio

A) the lower the capital depreciation rate.
B) the greater the amount of resources available for capital investment.
C) the more investment per worker is required to replace depreciating capital.
D) the less the economy needs to equip new workers with the same high level of capital.

Question 26

The idea that technological innovation has temporarily dried up rests on the argument that

A) greater competition from foreign countries has reduced the capital firms have to invest in research and development.
B) government support of research and development has fallen, reducing the amount of technological innovation that occurs.
C) the backlog of technological opportunities not exploited during the Great Depression and World War II has largely been used up.
D) government "red tape" has prevented many innovations from coming to market.

Question 27

The main reason economists such as Bally and Gordon don't think measurement issues are the primary explanation for the productivity slowdown since 1973 is

A) measurement problems explain only about 1% of the slowdown.
B) there are no measurement problems.
C) measurement problems also existed before 1973.
D) measurement problems are important in all industries.

Question 28

In the neoclassical growth model, if productivity does not grow,

A) output per worker will be constant.
B) output will grow at the same rate as the population growth.
C) consumption will be constant.
D) both A and B are correct.

Question 29

The computerization of police departments throughout the country has greatly reduced the crime rate. What macroeconomic variable is likely to be directly affected by this change?

A) productivity
B) inflation
C) the real interest rate
D) the trade deficit

Question 30

Which of the following statements does not describe the steady state of an economy, when technology is constant?

A) Investment per worker is equal to the requirement (break-even) investment.
B) Output per worker and consumption per worker are constant.
C) The growth rate of the output per worker is zero.
D) The capital per worker grows at a constant rate.

Question 31

All of the following are explanations for the post-1973 productivity slowdown except

A) problems in measuring productivity.
B) technological depletion.
C) higher oil prices.
D) greater competition from foreign imports.

Question 32

The oil price explanation of the slowdown in economic growth after 1973 is inconsistent with which of the following facts?

A) Prices of used capital goods that were dependent on oil did not drop sharply when oil prices increased.
B) The productivity slowdown began just as oil prices were quadrupled in 1973.
C) The productivity slowdown occurred in all industrial countries.
D) Industry-by-industry analysis of the impact on oil prices bears out the damage done by the oil price increases.

Question 33

During the period from 1984 to 1998, productivity growth was

A) positive and greater than productivity growth between 1962 and 1973.
B) positive but less than productivity growth between 1962 and 1973.
C) positive and greater than input growth.
D) negative.

Question 34

The per-worker production function in the Solow model assumes

A) constant returns to scale and increasing marginal productivity of capital.
B) constant returns to scale and diminishing marginal productivity of capital.
C) increasing returns to scale and diminishing marginal productivity of capital.
D) decreasing returns to scale and diminishing marginal productivity of capital.

Question 35

If f(k) = 6k^0.5, s = 0.1, n = 0.1, and d = 0.2, what is the value of f(k) at equilibrium?

A) 6
B) 12
C) 18
D) 24

Question 36

The idea that measurement problems could explain the productivity slowdown since 1973 is based on the fact that

A) official output measures make no adjustment for quality.
B) output can't be measured.
C) capital can't be measured.
D) quality improvements aren't fully accounted for in the data.

Question 37

In a steady-state economy,

A) the total capital stock remains constant.
B) net investment remains constant.
C) net investment equals the depreciation rate for the economy.
D) the total capital stock grows at the same rate as the labour force.

Question 38

Why do some people think that the productivity slowdown since 1973 is just a return to normalcy after fast productivity growth during the previous 25 years?

A) Productivity growth of the previous 25 years was abnormally low.
B) The Great Depression and World War II had prevented technological opportunities from being exploited.
C) Canada is the only country to face the slowdown, due to poor regulatory decisions.
D) Canada has allowed countries like Japan to steal its technological breakthroughs.

Question 39

Skeptics of the contribution of oil price hikes to the slowdown in economic growth after 1973 point out that

A) the productivity slowdown had begun prior to 1973.
B) the productivity slowdown occurred in only some industrial countries, but all were affected by the oil price hikes.
C) there is no theoretical reason why an oil price hike should cause a slowdown in productivity growth.
D) energy costs are a relatively small part of total costs in industrial countries.

Question 40

In a steady state,

A) both consumption per worker and the capital-labour ratio are constant.
B) consumption per worker is constant, but the capital-labour ratio can change.
C) capital and labour, by definition, are inversely related to one another.
D) consumption per worker can change, but the capital-labour ratio is constant.

Question 41

If the saving rate in Canada increases, the steady-state level of output

A) will grow at a higher rate.
B) will be higher.
C) will be the same.
D) will decline.

Question 42

Which of the following would cause an increase in consumption per worker in a steady state?

A) a permanent increase in the amount of immigration allowed into the country
B) a permanent decrease in energy prices
C) a reduction in the number of hours worked per person
D) a reduction in government expenditures on the nation's infrastructure

Question 43

One effect of the Gulf War was the destruction of a good portion of Kuwait's capital stock. How would you expect this to affect Kuwait's capital-labour ratio in the long run? There would be

A) a rightward movement along the saving-per-worker curve and an increase in the capital-labour ratio.
B) no change in the long-run capital-labour ratio.
C) a downward shift in the saving-per-worker curve and a decrease in the capital-labour ratio.
D) a leftward movement along the saving-per-worker curve and a decrease in the capital-labour ratio.

Question 44

If f(k) = 8^0.5, s = 0.2, n = 0.3, and d = 0.1, what is the value of k at equilibrium?

A) 1
B) 4
C) 9
D) 16

Question 45

An increase in the saving rate in a steady-state economy would cause

A) a rightward movement along the saving-per-worker curve and an increase in the capital-labour ratio.
B) an upward shift in the saving-per-worker curve and an increase in the capital-labour ratio.
C) a downward shift in the saving-per-worker curve and a decrease in the capital-labour ratio.
D) a leftward movement along the saving-per-worker curve and a decrease in the capital-labour ratio.

Question 46

Which of the following arguments would you make against a policy that discourages population growth?

A) It means less total output in the economy, reducing the country's ability to defend itself or influence world events.
B) It means less output per worker in the economy, reducing the country's ability to defend itself or influence world events.
C) It means more total output in the economy, increasing the country's ability to defend itself or influence world events.
D) It means more output per worker in the economy, increasing the country's ability to defend itself or influence world events.

Question 47

A productivity improvement will cause

A) a rightward movement along the saving-per-worker curve and an increase in the capital-labour ratio.
B) an upward shift in the saving-per-worker curve and an increase in the capital-labour ratio.
C) a downward shift in the saving-per-worker curve and a decrease in the capital-labour ratio.
D) a leftward movement along the saving-per-worker curve and a decrease in the capital-labour ratio.

Question 48

An increase in the growth rate of population in a steady-state economy would cause

A) a parallel shift upward in the investment line.
B) a pivot up and to the left in the investment line.
C) a pivot down and to the right in the investment line.
D) a parallel shift downward in the investment line.

Question 49

In the long run, a productivity improvement will cause

A) an increase in the capital-labour ratio and an increase in consumption per worker.
B) an increase in the capital-labour ratio and a decrease in consumption per worker.
C) a decrease in the capital-labour ratio and a decrease in consumption per worker.
D) a decrease in the capital-labour ratio and an increase in consumption per worker.

Question 50

If f(k) = 6k^0.5, s = 0.1, n = 0.1, and d = 0.2, what is the value of c (consumption) at equilibrium?

A) 10
B) 12
C) 10.8
D) 11.2

Question 51

If k = 10, y = 30, and s = 0.2, what is c (consumption)?

A) 24
B) 20
C) 18
D) 12

Question 52

The higher saving rate in an economy would result in

A) the higher economic growth in the long run.
B) the higher output per capita in the long run.
C) the higher productivity growth in the long run.
D) the lower output per capital in the long run.

Question 53

The Golden Rule of the capital stock is the level of capital stock that

A) maximizes the output per worker in the steady state.
B) maximizes the consumption per worker in the steady state.
C) maximizes the investment per worker in the steady state.
D) maximizes the saving per worker in the steady state.

Question 54

An increase in pollution has caused a permanent increase in the rate of capital depreciation. This would cause

A) capital per worker to increase.
B) output per worker to fall.
C) consumption per worker to increase.
D) the total capital stock to be unaffected.

Question 55

In the very long run, the level of consumption per worker can grow continually if

A) the saving rate continually falls.
B) the population growth rate continually rises.
C) productivity continually improves.
D) the depreciation rate continually rises.

Question 56

A productivity improvement raises steady-state output and consumption per worker in all the ways given below except

A) it increases the amount that can be produced at any given capital-labour ratio.
B) it decreases the depreciation rate of capital.
C) it causes the steady-state capital-labour ratio to rise.
D) it causes saving per worker to rise.

Question 57

In the long run, an increase in the saving rate in a steady-state economy will cause

A) an increase in the capital-labour ratio and an increase in consumption per worker.
B) an increase in the capital-labour ratio and a decrease in consumption per worker.
C) a decrease in the capital-labour ratio and a decrease in consumption per worker.
D) a decrease in the capital-labour ratio and an increase in consumption per worker.

Question 58

A decline in population growth will lead to a ________ in the steady-state capital-labour ratio and a ________ in output per worker.

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

Question 59

The Solow model demonstrates that

A) in the absence of productivity growth, economic growth will turn negative in the long run.
B) in the absence of productivity growth, economic growth will reach a steady state of zero per-capita growth in the long run.
C) productivity growth must exceed the rate of growth in the population to avoid a steady state in the long run.
D) productivity growth will inevitably decline due to diminishing marginal productivity.

Question 60

All else being equal, a permanent decrease in the saving rate in a steady-state economy would cause

A) an increase in the capital-labour ratio and an increase in consumption per worker.
B) an increase in the capital-labour ratio and a decrease in consumption per worker.
C) a decrease in the capital-labour ratio and a decrease in consumption per worker.
D) a decrease in the capital-labour ratio and an increase in consumption per worker.

Question 61

You support an industrial policy for Canada. Which of the following would be the weakest argument for an industrial policy?

A) The private sector is unlikely to undertake large, complex, risky investment programs without government assistance.
B) Canada must support its industries because Japan and other countries are subsidizing their high-tech firms.
C) Technological advance will be the primary source of economic growth in the future.
D) The government is able to take a longer view of investment strategies and is more successful at picking "winners" than is the private sector.

Question 62

Which of the following statement is not true?

A) In the Solow model, the marginal productivity of capital depends on the level of capital.
B) In the endogenous growth model, the marginal productivity of capital is diminishing.
C) In the Solow model, the marginal productivity of capital diminishes as capital increases.
D) In the endogenous growth model, the marginal productivity of capital is constant.

Question 63

a. Draw figures showing the relationship in the Solow model between the capital-labour ratio and (1) output per worker and steady-state investment per worker, (2) consumption per worker, and (3) steady-state investment per worker and saving per worker
b. Show what happens to each of your figures in part (a) when each of the following changes occur, and explain what happens to the capital-labour ratio, output per worker, and consumption per worker.
(1) population growth rises
(2) the depreciation rate falls
(3) the saving rate rises
(4) productivity declines

Question 64

Suppose the aggregate production function in ADANAC is Y_t = A K^1/3 L ^2/3. Assume A is constant and equal to 2.
a. What are the returns to scale in this production function?
b. Are there decreasing returns to labour and capital?
c. Write the aggregate production function in per worker terms.
d. Assume that saving rate is equal to 0.32, population growth 0.03, and the depreciation rate 0.05. What is the steady state level of output per worker?
e. If the saving rate decreases to 0.20, what would happen to the steady state level of output per worker?

Question 65

A country has the per-worker production function y_t = 3k_t^2/3, where y_t is output per worker and k_t is the capital-labour ratio. The depreciation rate is 0.1 and the population growth rate is 0.05. The saving function is S_t = 0.2Y_t, where St is total national saving and Yt is total output.
a. What is the steady-state value of capital-labour ratio?
b. What is the steady-state value of output per worker?
c. What is the steady-state value of consumption per worker?

Question 66

The explanations for why the marginal productivity of capital is not diminishing, in the endogenous growth model, rely on

A) constant saving rate in the steady state.
B) human capital and the R&D activities.
C) the golden rule level of capital.
D) the constant technological growth.

Question 67

From 2000 to 2001 a country's output rose from 4000 to 4500, its capital stock rose from 10,000 to 12,000, and its labour force declined from 2000 to 1750. Suppose a_K = 0.3 and a_N = 0.7.
a. How much did capital contribute to economic growth over the year?
b. How much did labour contribute to economic growth over the year?
c. How much did productivity contribute to economic growth over the year?

Question 68

If there is international trade and finance, output per worker will converge in rich and poor countries. Will consumption per worker converge?

A) Yes, with the same output, consumption must be the same.
B) Yes, in equilibrium, consumption per worker must be the same around the world.
C) No, because total output is different.
D) No, because part of the output must be used to repay foreign investors.

Question 69

Unconditional convergence means that in the long run,

A) living standards converge only within groups of countries having similar characteristics.
B) living standards converge only for countries that have the same initial capital-labour ratio.
C) living standards around the world become the same.
D) differences persist in living standards around the world.

Question 70

How does the possibility of international trade and finance affect the convergence conclusions of the Solow model?

A) Capital should flow from rich to poor countries.
B) Capital should flow from poor to rich countries.
C) Labour should flow from rich to poor countries.
D) Capital will flow to countries with low tariffs.

Question 71

You believe that democracy is compatible with high rates of economic growth. Which of the following arguments would you be least likely to use to justify this belief?

A) Democratic governments are more stable than dictatorships.
B) Democratic governments are less likely to start wars than dictatorships.
C) Democratic governments have better relations with advanced industrial nations than dictatorships.
D) Democratic governments are better able to undertake unpopular but necessary economic reforms.

Question 72

Conditional convergence means that in the long run,

A) living standards converge only within groups of countries having similar characteristics.
B) living standards converge only for countries that have the same initial capital-labour ratio.
C) living standards around the world become the same.
D) living standards converge even if countries have different population growth rates.

Question 73

Which of the following changes would lead to a higher living standards?

A) a higher saving rate, higher population rate, and higher productivity
B) a lower saving rate, higher population rate, and higher productivity
C) a lower saving rate, lower population rate, and higher productivity
D) a higher saving rate, lower population rate, and higher productivity

Question 74

The empirical evidence on convergence suggests that

A) there is support for conditional convergence.
B) there is support for unconditional convergence.
C) there is no support for any type of convergence.
D) there is support for unconditional convergence among all English-speaking countries.

Question 75

Country A has a capital-labour ratio that is initially twice as big as that of country B, but neither is yet in a steady state. Both countries have the same production function, f(k) = 6 k^1/2. Country A has a 10% saving rate, 10% population growth rate, and 5% depreciation rate, while country B has a 20% saving rate, 10% population growth rate, and 20% depreciation rate.
a. Calculate the steady-state capital- labour ratio for each country. Does the initial capital-labour ratio affect your results?
b. Calculate output per worker and consumption per worker for each country. Which country has the highest output per worker? The highest consumption per worker?
c. In general, do all the fundamental characteristics of different countries need to be identical for convergence of output per worker?

Question 76

A country has the per-worker production function y_t = 5k_t^0.5, where y_t is output per worker and k_t is the capital-labour ratio. The depreciation rate is 0.2 and the population growth rate is 0.05. The saving function is S_t = 0.2 y_t, where S_t is total national saving and Y_t is total output.
a. What is the steady-state value of the capital-labour ratio?
b. What is the steady-state value of output per worker?
c. What is the steady-state value of consumption per worker?

Question 77

In the past ten years, Patagonia's total output has increased from 2000 to 3000, the capital stock has risen from 4000 to 5200, and the labour force has increased from 400 to 580. Suppose a_K = 0.4 and a_N = 0.6.
a. How much did capital contribute to economic growth over the decade?
b. How much did labour contribute to economic growth over the decade?
c. How much did productivity contribute to economic growth over the decade?

Question 78

Government policy can improve the long-run economic growth through

A) providing an incentive for higher saving such as lower capital gain taxes.
B) encouraging more consumption and less saving.
C) increasing productivity growth by improving infrastructure, investing in human capital, and supporting R&D activities.
D) subsidizing the manufacturing industries.

Question 79

If in an economy the human capital increases with the increase in the physical capital,

A) there will be a diminishing marginal productivity of physical capital.
B) there will be no change in marginal productivity of physical capital.
C) the economy's growth rate will depend on its saving rate.
D) Both B and C are correct.

Question 80

The endogenous growth theory attempts to

A) replace the Solow model with a model in which money growth plays a key role.
B) explain how societies can more easily reach the "Golden Rule."
C) show how population growth reduces capital and output.
D) explain why productivity changes.