Deck 10: The Theory of Economic Growth

Question 1

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

Answer 1

average saving rate

Question 2

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.

Answer 2

it diverts private savings from the financing of private investment.

Question 3

Net investment is

A) savings less replacement savings.
B) replacement investment.
C) investment net of savings.
D) total investment less replacement investment.

Answer 3

total investment less replacement investment.

Question 4

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.

Question 5

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.

Question 6

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.

Question 7

In equilibrium, rate of growth of capital in a simple closed economy 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.

Question 8

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.

Question 9

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

Question 10

The application of Solow's growth theory to the explanation of the slowdown in productivity growth in the United States 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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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

Question 16

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.

Question 17

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.

Question 18

Steady state growth will occur according to Robert Solow when

A) y = k.
B) y = n.
C) kn = y.
D) k = n.

Question 19

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.

Question 20

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.

Question 21

Figure 10-2
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.

Question 22

Figure 10-2
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.

Question 23

Figure 10-2
Initially, the economy is at point B on Figure above. 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

Question 24

Figure 10-4
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.

Question 25

Figure 10-4
Initially, the economy is at point G in the figure above 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

Question 26

"Given the long run implication of Solow's growth model with respect to the rate of savings, the low savings rate in the United States 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.

Question 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.

Question 28

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.

Question 29

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.

Question 30

Figure 10-1
Initially, the economy is at point B on Figure above. 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.

Question 31

Figure 10-3
The economy will grow from points B to G in the figure above 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.

Question 32

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.

Question 33

Figure 10-3
Initially, the economy is at point B in the figure above 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.

Question 34

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.

Question 35

Figure 10-4
Initially, the economy is at point G in the figure above 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

Question 36

Figure 10-1
Initially, the economy is at point B on Figure above. 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

Question 37

Figure 10-4
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.

Question 38

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.

Question 39

Figure 10-3
Initially, the economy is at point B on Figure above 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.

Question 40

Figure 10-2
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.

Question 41

Figure 10-4
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.

Question 42

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

Question 43

Figure 10-4
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.

Question 44

Use b as the exponent for physical capital, and c as the exponent for human capital. Assume that b = 0.25 and c = 0.65. Further assume that per person income of a rich country is 10 times that of a poor country.
Refer to the information above. What is the value of the exponent for uneducated labor (L)?

A) 0.75
B) 0.35
C) 0.20
D) 0.10

Question 45

The introduction of human capital to the Solow neoclassical growth model reduces the significance of the contribution of ________ to increases in per capita income.

A) K
B) L
C) K and L
D) None of the above.

Question 46

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.

Question 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.

Question 48

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.
Refer to the information above. What is the value of the exponent for uneducated labor (L)?

A) 0.75
B) 0.40
C) 0.35
D) 0.15

Question 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.

Question 50

Figure 10-4
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.

Question 51

Use b as the exponent for physical capital, and c as the exponent for human capital. Assume that b = 0.25 and c = 0.65. Further assume that per person income of a rich country is 10 times that of a poor country.
Refer to the information above. 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) 12
B) 25
C) 100
D) 1000

Question 52

Figure 10-4
Given that all countries have the same Cobb-Douglas production function, i.e. 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.

Question 53

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.

Question 54

Figure 10-4
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.

Question 55

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.
Refer to the information above. 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
B) 100
C) 25
D) 15

Question 56

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.

Question 57

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

Question 58

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.

Question 59

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

Question 60

Figure 10-4
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.

Question 61

The per-person production function in Chapter 10 assumes that a one percent rise in (K/N) causes a ________ rise in (Y/N), and so it is diagrammed as a ________ line.

A) less-than-one-percent, downward-curling
B) less-than-one-percent, upward-curling
C) one percent, upward-curling
D) one percent, downward-curling
E) more-than-one-percent, straight

Question 62

The general form of the production function used in Chapter 10 is

A) Y = A + F(K, N).
B) Y = A - F(K, N).
C) Y = AF(K, N).
D) Y = A/F(K, N).

Question 63

In Chapter 10, depreciation is assumed to be

A) a fixed proportion of real GDP.
B) a fixed proportion of the capital stock.
C) a fixed absolute amount.
D) zero.
E) a fixed proportion of the capital-labor ratio.

Question 64

The variable used by economists as the best broad indicator of a nation's standard of living is

A) real GDP per person.
B) real GDP.
C) the capital-labor ratio.
D) the capital-output ratio.
E) multifactor productivity.

Question 65

Economic growth theory studies how real GDP changes ________, in other words the growth of ________ real GDP.

A) on average over long periods, natural
B) on average over long periods, actual
C) from one year to the next, natural
D) from one year to the next, actual

Question 66

A convenient rule of thumb called the "rule of 72" states that a quantity growing at x percent per year doubles in size approximately every (72/x) years.
Refer to the information above. An economy's real GDP per person doubles every 18 years when it maintains a growth rate of ________ per year.

A) 5.6 percent
B) 4.0 percent
C) 0.25 percent
D) 0.9 percent

Question 67

Since 1973, the average annual growth rate of real GDP per person in the United States has been slower than the average annual growth rate in:

A) Germany and Canada.
B) France and United Kingdom.
C) Japan and Italy.
D) France and Canada.

Question 68

A convenient rule of thumb called the "rule of 72" states that a quantity growing at x percent per year doubles in size approximately every (72/x) years.
Refer to the information above. If an economy can raise its annual real GDP growth rate from 1.8 percent to 2.4 percent, its real GDP doubling time is reduced by ________ years.

A) 30
B) 24
C) 10
D) 43.2

Question 69

In Chapter 10, the production function variable A has been given several different names. Which of the following is not one of them?

A) autonomous growth factor
B) infrastructure
C) multifactor productivity
D) residual

Question 70

An increase in government expenditures ________ "national saving" and thus tends to ________ private investment.

A) increases, increase
B) increases, decrease
C) decreases, increase
D) decreases, decrease

Question 71

A convenient rule of thumb called the "rule of 72" states that a quantity growing at x percent per year doubles in size approximately every (72/x) years.
Refer to the information above. If an economy has a real GDP doubling-time of 48 years, this can be reduced to 30 years if annual GDP growth is raised by ________ percentage points.

A) 4
B) 2.4
C) 1.6
D) 0.9

Question 72

The general form of the per-person production function used in Chapter 10 is

A) (Y/N) = A - f(N/K).
B) (Y/N) = A + f(N/K).
C) (Y/N) = A/f(K/N).
D) (Y/N) = Af(K/N).

Question 73

Using the textbook's production function, an increase in A requires that one percent more labor working with ________ capital produces more ________.

A) an unchanged amount of, real GDP
B) an unchanged amount of, real GDP per labor input
C) one percent more, real GDP
D) one percent more, real GDP per labor input

Question 74

Private investment is equal to the net addition to the capital stock ________ the depreciation of that capital stock.

A) plus
B) minus
C) times
D) divided by

Question 75

In Chapter 10, the variable N can be regarded as total population, workers, work-hours, or "effective" work-hours, all proxies for each other if they are assumed to grow at the same rate. To define (Y/N) as the standard of living, N is particularly regarded as

A) total population.
B) workers.
C) work-hours.
D) "effective" work-hours.

Question 76

Using the textbook's production function, if two percent more labor working with two percent more capital produces two percent more real GDP, then "multifactor productivity" has

A) risen by four percent.
B) risen by two percent.
C) remained unchanged.
D) fallen by one percent.
E) fallen by two percent.

Question 77

The current slowdown in productivity growth afflicting most of the industrialized countries is commonly thought to have begun around

A) 1897.
B) 1929.
C) 1948.
D) 1973.
E) 1984.

Question 78

Extensive growth is driven by

A) very high savings rates.
B) rapid capital accumulation.
C) improved multifactor productivity.
D) A and B.
E) all of the above.

Question 79

The introduction of human capital to the Solow neoclassical growth model ________ the predicted rate of return on investment in rich countries relative to poor countries.

A) increases
B) reduces
C) may either increase or reduce
D) has no effect on

Question 80

According to Robert E. Hall and Charles Jones, successful economic performance requires

A) a favorable infrastructure of rules and institutions.
B) minimizing corruption and criminality.
C) the use of one of the eight major international languages.
D) A and B.
E) all of the above.