Deck 5: The Solow Growth Model

Question 1

In the Solow model, if , the capital stock:

A) declines.
B) stays the same.
C) grows.
D) Not enough information is given.
E) None of these answers is correct.

Answer 1

grows.

Question 2

In 2014, the Philippines per capita GDP was about ________, while in South Korea it was ________.

A) $6,600; over $35,000
B) $10,000; $15,000
C) half that of the United States; twice that of the United States
D) $1,000; $2,000
E) $35,000; the same

Answer 2

$6,600; over $35,000

Question 3

In the Solow model, it is assumed that a(n) ________ fraction of capital depreciates regardless of the capital stock.

A) increasing
B) constant
C) decreasing
D) undetermined
E) None of these answers is correct.

Answer 3

constant

Question 4

The Solow model of economic growth:

A) endogenizes labor.
B) endogenizes physical capital.
C) exogenizes physical capital.
D) exogenizes investment.
E) endogenizes investment.

Question 5

The key insight in the Solow model is that:

A) saving rates are determined in a particular manner.
B) savings have no impact on economic growth.
C) capital depreciation enhances economic growth.
D) the relationship between capital and output is static.
E) capital accumulation contributes to economic growth.

Question 6

In the Solow model, the parameter denotes ________ and is ________.

A) investment; less than one
B) the depreciation rate; equal to zero
C) consumption; greater than one
D) the depreciation rate; less than one
E) investment; greater than one

Question 7

The Solow model describes:

A) how saving rates are determined.
B) the static relationship between capital and output.
C) how savings, population growth, and technological change affect output over time.
D) how savings, population growth, and technological change affect output in a single period.
E) what constitutes technological change.

Question 8

In the corn farm example, saving some of the corn produced:

A) future output, which grows over time.
B) lower consumption in the future.
C) future output, which declines over time.
D) higher consumption today.
E) technological change.

Question 9

In the Solow model, in every period, a fraction of total output ________, which ________ next period's capital stock.

A) is saved; reduces
B) depreciates; adds to
C) is saved; adds to
D) is consumed; adds to
E) is consumed; reduces

Question 10

In the Solow model, the equation of capital accumulation is:

A) .
B) .
C) .
D) .
E) .

Question 11

Using the Solow model, if, in time t = 50, the capital stock is K₅₀ =150, investment is I₅₀ = 15, and is the depreciation rate, capital accumulation from period 50 to 51 is:

A) $\Delta$ K₅₁ =5.
B) $\Delta$ K₅₁ =-15.
C) $\Delta$ K₅₁ = 15.
D) $\Delta$ K₅₁ = 120.
E) $\Delta$ K₅₁ =0.

Question 12

Using the Solow model, if, in time t = 0, the initial capital stock is K₀ = 100, investment is I₀ = 25, and .1 is the depreciation rate, capital accumulation from period 0 to period 1 is:

A) $\Delta$ K₁ = 35.
B) $\Delta$ K₁ =-15.
C) $\Delta$ K₁ = 15.
D) $\Delta$ K₁ =0.
E) $\Delta$ K₁ = 115.

Question 13

In the Solow model, if investment is ________ depreciation, the capital stock ________.

A) less than; grows
B) greater than; grows
C) greater than; declines
D) equal to; declines
E) equal to; grows

Question 14

In 1960, the Philippines had a per capita income ________ South Korea's. In 2014, ________.

A) lower than; this situation had reversed
B) lower than; per capita income was equal in both countries
C) equal to; South Korea had higher per capita income
D) higher than; this situation had reversed
E) higher than; this difference was even more pronounced

Question 15

In the corn farm example, corn can be used as:

A) only investment.
B) either saving or depreciation.
C) only consumption.
D) either consumption or investment.
E) tax revenue.

Question 16

If C_t denotes consumption, I_t denotes investment, and Y_t is output, the resource constraint in the Solow model is:

A) Y_t = C_t -I_t.
B) .
C) .
D) .
E) None of these answers is correct.

Question 17

In the Solow model, defining as the saving rate, Y_t as output, and C_t as consumption, investment I_t is given by:

A) .
B) .
C) .
D) .
E) .

Question 18

In the simple Solow model, we assume:

A) the depreciation rate is negative.
B) net investment is always positive.
C) TFP equals one.
D) labor is exogenous.
E) the saving rate changes frequently.

Question 19

In the Solow model, defining as the saving rate, Y_t as output, and I_t as investment, consumption is given by:

A) .
B) .
C) .
D) .
E) .

Question 20

The production function used in the Solow model is:

A) .
B) .
C) .
D) .
E) .

Question 21

In the Solow model, if net investment is positive:

A) capital accumulation is zero.
B) capital accumulation is negative.
C) capital accumulation is positive.
D) savings are negative.
E) Not enough information is given.

Question 22

If we define the saving rate as , output as
, and the depreciation rate as
And if
, the economy is:

A) contracting.
B) at the steady state.
C) growing.
D) in its short-run equilibrium.
E) None of these answers is correct.

Question 23

The endogenous variables in the Solow model are:

A) the capital stock, labor, and output.
B) consumption, investment, the capital stock, labor, and the saving rate.
C) consumption, investment, the capital stock, labor, and output.
D) productivity and the depreciation and saving rates.
E) the capital stock, labor, output, and the saving rate.

Question 24

Which of the following is an exogenous variable in the Solow model?

A) productivity
B) the depreciation rate
C) the saving rate
D) the initial capital stock
E) All of these answers are correct.

Question 25

If we define the saving rate as , output as
, and the depreciation rate as
And if
, the economy is:

A) contracting.
B) growing.
C) at the steady state.
D) in its short-run equilibrium.
E) None of these answers is correct.

Question 26

Refer to the following figure when answering the following questions.
Figure 5.1: Solow Diagram
In Figure 5.1, if the economy begins with the initial capital stock at K₃, the capital stock will ________ and the economy will ________.

A) increase; grow
B) decrease; shrink
C) stay constant; be in its steady state
D) decrease; be in its steady state
E) stay constant; shrink

Question 27

The Solow model assumes the:

A) capital stock is constant.
B) number of workers is growing.
C) number of workers is constant.
D) saving rate changes each period.
E) depreciation rate changes each period.

Question 28

In the Solow model, investment, I_t, as a function of saving, , and output,
, is written as:

A) .
B) .
C) .
D) .
E) .

Question 29

The Solow model assumes the saving rate is:

A) zero.
B) constant.
C) decreasing as income increases.
D) increasing as income increases.
E) larger as the interest rate rises.

Question 30

Refer to the following figure when answering the following questions.
Figure 5.1: Solow Diagram
In Figure 5.1, if the economy begins with the initial capital stock at K₂, the capital stock will ________ and the economy will ________.

A) decrease; grow
B) increase; grow
C) stay constant; be in its steady state
D) stay constant; shrink
E) stay constant; grow

Question 31

Refer to the following figure when answering the following questions.
Figure 5.1: Solow Diagram
In Figure 5.1, the capital stock at K₁ is not the steady state because:

A) the saving rate is too low.
B) the saving rate is too high.
C) the depreciation rate is too low.
D) gross investment is higher than capital depreciation.
E) gross investment is lower than capital depreciation.

Question 32

Capital accumulation is a(n):

A) stock.
B) flow.
C) final good.
D) intermediate good.
E) None of these answers is correct.

Question 33

The amount of capital in an economy is a(n) ________, while the amount of investment is a(n) ________.

A) flow; stock
B) stock; flow
C) final good; intermediate good
D) intermediate good; final good
E) None of these answers is correct.

Question 34

Refer to the following figure when answering the following questions.
Figure 5.1: Solow Diagram
In Figure 5.1, if the economy begins with the initial capital stock at K₁, the capital stock will ________ and the economy will ________.

A) decrease; grow
B) increase; grow
C) stay constant; shrink
D) decrease; shrink
E) stay constant; grow

Question 35

The equation is called:

A) saving.
B) investment.
C) net investment.
D) the capital stock.
E) depreciation.

Question 36

The steady state is defined as the point where capital accumulation, $\Delta$ K_t, is equal to:

A) the saving rate.
B) zero.
C) the depreciation rate.
D) the productivity growth rate.
E) the population growth rate.

Question 37

A change in the capital stock, $\Delta$ K_t, can be expressed as a function of the saving rate, ; output,
; the capital stock, K_t ; and the depreciation rate,
, by:

A)
B) .
C)
D)
E)

Question 38

Refer to the following figure when answering the following questions.
Figure 5.1: Solow Diagram
In Figure 5.1, at K₁, net investment is ________ and the economy ________.

A) negative; will grow
B) positive; is in its steady state
C) zero; is in its steady state
D) positive; will grow
E) negative; will contract

Question 39

Which of the following is/are left out of the Solow model?

A) productivity
B) consumption
C) real interest rates
D) the saving rate
E) depreciation

Question 40

In the Solow model, net investment is defined as:

A) investment plus capital depreciation.
B) investment minus capital depreciation.
C) the saving rate minus the depreciation rate.
D) the saving rate plus the depreciation rate.
E) None of these answers is correct.

Question 41

Assume a production function is given by . If
And
, and the steady-state capital stock is 8.0, the steady-state level of output is about:

A) 8.0.
B) 4.0.
C) 45.4.
D) 2.0.
E) 22.6.

Question 42

An increase in ________ leads to a higher steady-state level of output per worker, and a decline in the ________ leads to a lower steady-state level of output per worker.

A) productivity; saving rate
B) the saving rate; initial capital stock
C) the saving rate; depreciation rate
D) the initial capital stock; saving rate
E) None of these answers is correct.

Question 43

Refer to the following figure when answering the following questions.
Figure 5.3: Solow Diagram
In Figure 5.3, at K₂, capital accumulation is ________, the economy is ________, and consumption is ________.

A) positive; growing; positive
B) zero; in the steady state; zero
C) negative; growing; positive
D) zero; in the steady state; positive
E) zero; contracting; negative

Question 44

The steady-state level of output per worker in the Solow model, with the production function , is given by:

A) .
B) .
C) .
D) .
E) .

Question 45

In the standard production model's production function, the productivity parameter enters the equation with an exponent of one, while in the Solow model's equation for the steady-state stock of capital it is greater than one because:

A) the endogenous level of the capital stock itself depends on productivity.
B) there is no productivity parameter in the production function model.
C) the productivity measure is zero in the production function model.
D) the productivity measure is negative in the Solow model.
E) the exogenous level of the capital stock itself depends on productivity.

Question 46

In the Solow model, if capital is in the steady state, output:

A) will continue to grow.
B) is also in the steady state.
C) will continue to grow, but its rate of growth will slow down.
D) will decline, but its rate of growth will be positive.
E) will begin to contract.

Question 47

Refer to the following figure when answering the following questions.
Figure 5.3: Solow Diagram
In Figure 5.3, at K₁, the difference between and
Is ________, and the difference between Y and
Is ________.

A) output; investment
B) net investment; consumption
C) gross investment; consumption
D) output; consumption
E) depreciation; gross investment

Question 48

Assume a production function is given by . If
, the depreciation rate is
, and the saving rate is
The steady-state level of capital is about:

A) 0.3.
B) 1.3.
C) 2.8.
D) 0.8.
E) 1.6.

Question 49

Assume a production function is given by . If
And
, the depreciation rate is
, and the saving rate is
, the steady-state level of capital is about:

A) 0.1.
B) 2.5.
C) 1.6.
D) 8.0.
E) 0.6.

Question 50

According to the Solow model, in the steady state, countries with high saving rates should have a:

A) low labor-output ratio.
B) low capital-output ratio.
C) high capital-output ratio.
D) high depreciation rate.
E) high A.

Question 51

In the Solow model, it is assumed a(n) ________ fraction of capital depreciates each period.

A) zero
B) increasing
C) decreasing
D) constant
E) None of these answers is correct.

Question 52

Over the past 30 years, ________ has averaged a saving rate of ________ percent.

A) Japan; 15
B) Russia; 5
C) the United States; 15
D) South Korea; 35
E) China; 12.5

Question 53

An increase in ________ leads to a higher steady-state level of output, and an increase in ________ leads to a lower steady-state level of output.

A) the saving rate; the depreciation rate
B) the saving rate; productivity
C) productivity; the initial capital stock
D) the depreciation rate; the labor stock
E) None of these answers is correct.

Question 54

The key difference between the Solow model and the production model is that the:

A) Solow model endogenizes the process of capital accumulation.
B) production function model endogenizes the process of capital accumulation.
C) Solow model uses different values for the capital share.
D) Solow model does not contain a productivity measure.
E) Solow model exogenizes the process of capital accumulation.

Question 55

An increase in ________ leads to a higher steady-state capital stock, and a decline in ________ leads to a lower steady-state capital stock.

A) the saving rate; the depreciation rate
B) the saving rate; productivity
C) productivity; the initial capital stock
D) the depreciation rate; the labor stock
E) None of these answers is correct.

Question 56

Over the past 30 years, ________ has averaged a saving rate of ________ percent.

A) Japan; 15
B) Russia; 5
C) the United States; 25
D) South Korea; 45
E) China; 12.5

Question 57

In the Solow model, the ________ plays a ________ role than it does in the standard production function model.

A) labor supply; larger
B) productivity parameter; larger
C) capital stock; larger
D) capital stock; smaller
E) productivity parameter; smaller

Question 58

If the production function is given by , the saving rate, s, is 20 percent; the depreciation rate,
, is 10 percent; and
, the steady-state level of output is:

A) 1.4.
B) 4.0.
C) 2.0.
D) 8.0.
E) 3.5.

Question 59

If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates are unchanged, the Solow model predicts that the economy will grow and eventually reach:

A) the same steady-state level of output as it would have before the disaster.
B) a higher steady-state level of output than it would have before the disaster.
C) a lower steady-state level of output than it would have before the disaster.
D) Not enough information is given.
E) None of these answers is correct.

Question 60

In the Solow model, if, in the absence of any shocks, the capital stock remains at K* forever, this rest point is called the:

A) saving rate.
B) short-run equilibrium.
C) steady state.
D) rate of capital accumulation.
E) dynamic system.

Question 61

An implication of the Solow model is that once an economy reaches the steady state:

A) long-term growth continues indefinitely.
B) long-term growth does not continue.
C) long-term growth accelerates.
D) long-term growth decelerates.
E) None of these answers is correct.

Question 62

Refer to the following figure when answering the following questions.
Figure 5.4: Solow Diagram



-Consider the Solow model exhibited in Figure 5.4. Which of the following is/are true?
i. For any single country, the movement from point a to b is due to an increase in the saving Rate, s₁ $\gt$ s₂.
ii. For any single country, the movement from point c to b is due to an increase in capital Stock for the saving rate, s₂.
iii. If s₁ and s₂ stand for the saving rates in Countries 1 and 2, respectively, Country 2 has a Lower saving rate.

A) i
B) ii
C) iii
D) i and ii
E) i, ii, and iii

Question 63

Immediately following the increase in the saving rate, output grows rapidly. As the economy approaches its new steady state, the growth rate:

A) gradually increases.
B) gradually declines.
C) is constant.
D) is negative.
E) None of these answers is correct.

Question 64

In the Solow model, saving and investing in additional factories and computers does ________ output to grow in the ________ run if the economy is below Y*. But, in the long run, the ________ returns to capital accumulation lead the return to these investments to fall.

A) lead; medium; diminishing
B) lead; long; increasing
C) lead; medium; increasing
D) not lead; medium; diminishing
E) not lead; long; increasing

Question 65

Refer to the following figure when answering the following questions.
Figure 5.4: Solow Diagram
Figure 5.4 represents two countries, 1 and 2. Country ________ has a higher saving rate and will have a ________ steady state than the other country.

A) 2; lower
B) 1; higher
C) 2; higher
D) 1; lower
E) Not enough information is given.

Question 66

Refer to the following figure when answering the following questions.
Figure 5.5: Solow Diagram
Consider the Solow model exhibited in Figure 5.5. Which of the following is/are true?
i. If 1 denotes Country 1 and 2 denotes Country 2, Country 1 has a higher saving rate.
ii. If 1 denotes Country 1 and 2 denotes Country 2, Country 1 has a lower depreciation rate.
iii. If 1 denotes Country 1 and 2 denotes Country 2, Country 2 has a lower steady state.

A) i
B) ii
C) iii
D) ii and iii
E) i, ii, and iii

Question 67

Refer to the following figure when answering the following questions.
Figure 5.5: Solow Diagram
Figure 5.5 represents two countries, 1 and 2. Country ________ has a higher depreciation rate and, therefore, has a ________ steady state than the other country.

A) 1; higher
B) 1; lower
C) 2; higher
D) 2; lower
E) Not enough information is given.

Question 68

In the Solow model, with population growth:

A) there is no steady state in output per person.
B) the economy never settles down to a steady state and exhibits growth in output per person.
C) the economy eventually settles down to a steady state in output per person.
D) the economy eventually settles down to a steady state with no growth in aggregate output.
E) None of these answers is correct.

Question 69

Which of the following best answers whether growth in the labor force leads to overall economic growth?

A) Population growth can produce growth in the Solow model in the aggregate but not in output per person.
B) Total capital and production per worker can grow as the population of the economy grows.
C) It never does-only capital contributes to aggregate economic growth.
D) Population growth can produce growth in the Solow model in the aggregate and in output per person.
E) Population growth increases output per person but not aggregate output.

Question 70

A central lesson of the Solow model is that:

A) capital accumulation cannot serve as the engine of long-run per capita economic growth.
B) capital accumulation is the only engine of long-run per capita economic growth.
C) consumption is the only engine of short-run per capita economic growth.
D) saving rates serve as the engine of long-run per capita economic growth.
E) the initial capital stock plays a large part in long-run economic growth.

Question 71

In the Solow model, if a country's saving rate increases, the country:

A) moves from a relatively low steady state to one that is lower.
B) moves from a relatively low steady state to one that is higher.
C) moves from a relatively high steady state to one that is lower.
D) stays at a constant high steady state.
E) stays at a constant low steady state.

Question 72

If we define and
As the saving rates in Countries 1 and 2, respectively,
As the depreciation rates in Countries 1 and 2, respectively, and
And
As productivity in Countries 1 and 2, respectively, in the Solow model, the equation ________ predicts that ________ differences contribute the most to differences in steady-state output per worker.

A) ; productivity
B) ; saving rate
C) ; productivity
D) ; productivity
E) ; saving rate

Question 73

If we define and
As the saving rates,
As the depreciation rates, and
And
As productivity in Countries 1 and 2, respectively, and the production function per capita is given by
In both countries, the Solow model predicts that the ratio of GDP per worker in Country 1 relative to Country 2 is:

A) .
B) .
C) .
D) .
E) .

Question 74

A decline in the saving rate causes the steady-state level of output:

A) and capital to rise.
B) to rise and capital to fall.
C) and capital to fall.
D) and capital to remain constant.
E) to rise and capital to remain constant.

Question 75

An implication of the Solow model is that once an economy reaches the steady state, per capita:

A) consumption is constant.
B) output is constant, but per capita capital is not.
C) capital is variable.
D) consumption continues to grow.
E) consumption is growing.

Question 76

If the depreciation and saving rates are constant, the economy eventually will reach the steady state in the Solow model because of:

A) the lack of productivity.
B) increasing returns to capital in production.
C) constant returns to capital in production.
D) diminishing returns to capital in production.
E) increasing returns to labor in production.

Question 77

Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state, the country with the higher saving rate will have ________ level of total output and ________ rate of growth of output than/as the country with the lower saving rate.

A) a higher; a higher
B) a higher; the same
C) a lower; a higher
D) a higher; a lower
E) the same; the same

Question 78

Refer to the following figure when answering the following questions.
Figure 5.4: Solow Diagram


Consider the Solow model exhibited in Figure 5.4. If a country's saving rate increases from s₁ to s₂, the economy would:

A) move from point a to point b.
B) move from point c to point a.
C) move from point c to point b.
D) move from point a to point c.
E) stay at point b.

Question 79

In the Solow model, if we assume that capital depreciation rates are the same across all countries, differences in per capita output can be explained by:

A) the steady-state capital stock.
B) the initial capital stock and saving rates.
C) differences in productivity and saving rates.
D) the labor stock and saving rates.
E) None of these answers is correct.

Question 80

Suppose you are given the data for Brazil and Portugal. In Brazil, the saving rate is 0.1 and the depreciation rate is 0.1, while in Portugal the saving rate is 0.2 and the depreciation rate is 0.1. Using the Solow model, you conclude that in the steady state:

A) Brazil has a higher level of output than Portugal.
B) Brazil has a higher capital-output ratio than Portugal.
C) Portugal has a higher level of output than Brazil.
D) Portugal has a higher capital-output ratio than Brazil.
E) Portugal and Brazil have the same capital-output ratio.