Deck 11: Saving, Capital Accumulation and Output

Question 1

Suppose, due to the effects of a military conflict that has ended, that a country experiences a large decrease in its capital stock. Assume no other effects of this event on the economy. Which of the following will tend to occur as the economy adjusts to this situation?

A) Positive growth, followed by negative growth, and then zero growth.
B) A relative high growth rate for some time.
C) No growth at all, until its capital stock has been replaced by other countries.
D) Zero growth for some time, followed by a gradually increasing growth rate.
E) A relatively low growth rate for some time.

Answer 1

A relative high growth rate for some time.

Question 2

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher stock of human capital than country B. Given this information, we know with certainty that:

A) output per worker will be the same in the two countries.
B) the growth rate will be the same in the two countries.
C) the growth rate will be higher in A than in B.
D) the growth rate will be higher in B than in A.
E) capital per worker will be the same in the two countries.

Answer 2

the growth rate will be the same in the two countries.

Question 3

Assume zero population growth and zero technical change. If an outbreak of war destroys a large portion of a country's capital stock but the saving rate and the rate of depreciation are unchanged, the growth model predicts that output will:

A) cease to grow.
B) grow but the new steady state will be at a higher output level than before.
C) grow but the new steady state will be at a lower output level than before.
D) decrease to a new steady state.
E) grow and the new steady state will be at the same output level as before.

Answer 3

grow and the new steady state will be at the same output level as before.

Question 4

Suppose an economy experiences a 6% increase in K, N, and H (human capital). Given this information, we know with certainty that:

A) Y will increase by less than 6%.
B) Y will increase by more than 6%.
C) Y will not change.
D) Y will increase by exactly 6%.
E) Y will increase by less than 12% but more than 6%.

Question 5

The countries with the lowest output per person:

A) are rich with physical capital, but have little human capital.
B) may or may not be poor in human capital, depending on whether the exchange rate or purchasing power parity method is used for comparison.
C) have low living standards in spite of relatively high levels of both human and physical capital.
D) are rich with human capital, but have little physical capital.
E) are poor in both human and physical capital.

Question 6

Suppose the saving rate is initially greater than the golden rule saving rate. We know with certainty that a decrease in the saving rate will cause:

A) a decrease in consumption per worker.
B) a decrease in output per worker.
C) a decrease in the rate of growth in the long run.
D) All of the above.
E) None of the above.

Question 7

Based on our understanding of the growth model with no technological progress, which of the following will cause a permanent increase in growth?

A) An increase in the saving rate.
B) An increase in education spending.
C) An increase in capital accumulation.
D) All of the above.
E) None of the above.

Question 8

Suppose the saving rate is initially less than the golden rule saving rate. We know with certainty that a decrease in the saving rate will cause:

A) a decrease in consumption per worker.
B) a decrease in output per worker.
C) a decrease in the capital- labour ratio.
D) All of the above.
E) None of the above.

Question 9

With the presence of technological progress, for this economy, we know that the level of output per worker will:

A) increase over time.
B) increase or decrease, depending on the rate of saving.
C) decrease as a result of decreasing returns to scale.
D) increase or decrease, depending on the rate of depreciation.
E) remain constant.

Question 10

If endogenous growth models are correct, a lower rate of growth in the long run could occur as a result of which of the following?

A) A lower rate of depreciation.
B) A redefinition of depreciation.
C) A lower rate of saving.
D) A redefinition of the steady state.
E) A redefinition of saving.

Question 11

Assume that technological progress does not occur. In Japan, the rate of saving has generally been greater than in the U.S. Given this information, we know that in the long run:

A) The U.S. growth rate will be greater than the Japanese growth rate.
B) Output per worker in Japan will be greater than U.S. output per worker.
C) Output per worker in the U.S. will be greater than Japanese output per worker.
D) Japan's growth rate will be greater than the U.S. growth rate.
E) Capital per worker in Japan will be no different than U.S. capital per worker.

Question 12

In the richer countries, over the past two centuries:

A) physical capital has increased significantly, but not human capital.
B) physical capital has steadily increased, while human capital first increased and then decreased.
C) human capital has increased significantly, but not physical capital.
D) physical and human capital have both increased significantly.
E) physical and human capital have both increased significantly, but the increase in physical capital has caused almost all of the growth in output.

Question 13

Which of the following will likely cause an increase in output per worker?

A) An increase in education expenditures.
B) An increase in on- the- job training.
C) An increase in capital accumulation.
D) An increase in the saving rate.
E) All of the above.

Question 14

Suppose the economy is initially in the steady state. A decrease in the depreciation rate (6) will cause:

A) a decrease in Y/N.
B) a decrease in C/N.
C) an increase in K/N.
D) an increase in the growth rate in the long run.
E) a decrease in the saving rate.

Question 15

Our model of long- run economic growth suggests that:

A) a higher rate of saving in Australia cannot do much to increase the Australian growth rate over the next two decades.
B) the Australian growth slowdown since 1950 has been caused largely by low saving in Australia.
C) saving in Australia has exceeded the golden- rule level.
D) an increase in the Australian saving rate is likely to raise consumption in the future.
E) an increase in the Australian saving rate is likely to reduce consumption in the future.

Question 16

Suppose a recent budgetary policy results in an increase in the national saving rate. Such a change in the saving rate will not affect which of the following variables in the long run?

A) The rate of growth of capital per worker.
B) The level of output.
C) The level of investment.
D) Capital per worker.
E) Output per worker.

Question 17

Which of the following situations will result in an increase in the capital- labour ratio?

A) Investment per worker equals saving per worker.
B) Saving per worker equals depreciation per worker.
C) Output per worker exceeds capital per worker.
D) Investment per worker exceeds depreciation per worker.
E) Investment per worker is less than depreciation per worker.

Question 18

Which of the following represents the change in the capital stock?

A) Output minus depreciation.
B) Capital minus depreciation.
C) Investment minus depreciation.
D) Consumption minus depreciation.
E) Investment minus saving.

Question 19

Suppose the economy is operating at the steady state and that there is no technological progress. Which of the following is true given this information?

A) The growth of output per worker is equal to the rate of saving.
B) The growth of output per worker is positive.
C) The growth of output per worker is equal to the rate of investment.
D) The growth of output per worker is zero.
E) The growth of output per worker is equal to the rate of depreciation.

Question 20

Suppose the following situation exists for an economy: Kt+1/N < Kt/N. Given this information, we know that:

A) consumption per worker will tend to fall as the economy adjusts to this situation.
B) saving per worker equals depreciation per worker in period t.
C) The saving rate increased in period t.
D) saving per worker is greater than depreciation per worker in period t.
E) saving per worker is less than depreciation per worker in period t.

Question 21

Suppose the following situation exists for an economy: Kt+1/N > Kt/N. Given this information, we know that:

A) saving per worker equals depreciation per worker in period t.
B) the saving rate fell in period t.
C) saving per worker is greater than depreciation per worker in period t.
D) the saving rate rose in period t.
E) saving per worker is less than depreciation per worker in period t.

Question 22

Assume that technological progress does not occur. Which of the following variables will not change when the economy reaches steady- state equilibrium?

A) Output per worker.
B) Investment per worker.
C) Capital per worker.
D) All of the above.
E) Only A and B.

Question 23

Suppose two countries are identical in every way with the following exception. Economy A has a higher rate of depreciation (6) than economy B. Given this information, we know with certainty that:

A) steady state consumption in A and B are the same.
B) steady state growth of output per worker is higher in B than in A.
C) steady state growth of output per worker is higher in A than in B.
D) steady state consumption in A is lower than in B.
E) steady state consumption in A is higher than in B.

Question 24

Suppose two countries are identical in every way with the following exception. Economy A has a greater quantity of human capital than economy B. Given this information, we know with certainty that:

A) steady state output per worker in A is higher than in B.
B) steady state growth of output per worker is higher in A than in B.
C) steady state consumption in A and B are the same.
D) steady state output per worker in A is lower than in B.
E) steady state growth of output per worker is higher in B than in A.

Question 25

The golden rule level of capital refers to:

A) the level of capital that maximises output per worker.
B) the level of capital that maximises consumption per worker in the steady state.
C) the level of capital that maximises the level of output in the steady state.
D) the level of capital that maximises consumption per worker.
E) the level of capital that maximises the standard of living.

Question 26

Suppose two countries are identical in every way with the following exception: Economy A has a higher saving rate than economy B. Given this information, we know with certainty that:

A) steady state growth of output per worker is higher in A than in B.
B) steady state consumption in A and B are the same.
C) steady state consumption in A is higher than in B.
D) steady state consumption in A is lower than in B.
E) None of the above.

Question 27

Which of the following are reasons to suspect spending on education might overestimate human capital investment?

A) Much human capital investment comes from on- the- job training.
B) Education spending leaves out foregone wages.
C) Part of total spending on education is really consumption.
D) All of the above.
E) None of the above.

Question 28

Suppose an economy experiences a decrease in the saving rate. We know with certainty that this decrease in the saving rate will:

A) decrease the growth of output per worker only temporarily.
B) increase the steady state growth of output per worker.
C) increase the growth of output per worker only temporarily.
D) have an ambiguous effect on the growth of output per worker.
E) decrease the steady state growth of output per worker.

Question 29

Suppose there are two countries that are identical in every way with the following exception: Country A has a lower depreciation rate (6) than country B. Given this information, we know with certainty that:

A) K/N will be the same in the two countries.
B) the growth rate will be higher in B than in A.
C) K/N will be higher in A.
D) K/N will be higher in B.
E) the growth rate will be higher in A than in B.

Question 30

Suppose an economy experiences an increase in the saving rate. We know with certainty that this increase in the saving rate will:

A) increase steady state consumption only if the new saving rate is less than the golden rule rate.
B) decrease steady state consumption only if the new saving rate is less than the golden rule rate.
C) have no effect on steady state consumption.
D) increase steady state consumption.
E) decrease steady state consumption.

Question 31

Suppose the economy is initially in the steady state. An increase in the depreciation rate (6) will cause:

A) a decrease in Y/N.
B) a decrease in C/N.
C) a decrease in K/N.
D) All of the above.
E) None of the above.

Question 32

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher saving rate than country B. Given this information, we know with certainty that:

A) the growth rate will be higher in B than in A.
B) the growth rate will be the same in the two countries.
C) the level of consumption per worker will be higher in B.
D) the level of consumption per worker will be higher in A.
E) the growth rate will be higher in A than in B.

Question 33

Which of the following statements is always true?

A) The increase in investment is equal to the capital stock minus depreciation.
B) Investment equals depreciation.
C) Any change in the capital stock is equal to investment minus depreciation.
D) The capital stock is equal to investment minus depreciation.
E) Investment equals the capital stock minus depreciation.

Question 34

Suppose the economy is operating at the steady state. Which of the following is true given this information?

A) Steady state saving is more than total consumption.
B) Steady state saving is just sufficient to cover depreciation.
C) Steady state saving exceeds depreciation each year by a constant amount.
D) Steady state saving equals consumption.
E) Steady state saving is less than total consumption.

Question 35

Suppose there is a decrease in the rate of saving. This decrease in the saving rate must cause a decrease in consumption per person in the long run when:

A) the rate of saving exceeds the rate of depreciation.
B) technological progress depends on human capital.
C) the saving is used for education rather than physical capital.
D) capital per worker is already less than the golden- rule level.
E) there is no technological progress.

Question 36

Which of the following will cause a decrease in output per worker in the long run?

A) An increase in the depreciation rate.
B) A decrease in the stock of human capital.
C) A decrease in the stock of physical capital.
D) A decrease in the saving rate.
E) All of the above.

Question 37

When steady state capital per worker is below the golden- rule level, we know with certainty that an increase in the saving rate will:

A) increase consumption in the short run, and decrease it in the long run.
B) decrease consumption in the short run, and increase it in the long run.
C) decrease consumption in both the short run and the long run.
D) increase consumption in both the short run and the long run.
E) None of the above.

Question 38

Suppose an economy experiences a 5% increase in human capital. We know that this will cause:

A) Y/N to increase by exactly 5%.
B) no change in Y/N.
C) a decrease in Y/N.
D) Y/N to increase by more than 5%.
E) Y/N to increase by less than 5%.

Question 39

The main macroeconomic implication of a pay- as- you- go social securtiy system is:

A) total saving decreases and capital accumulation decreases.
B) no effect on total saving and capital accumulation decreases.
C) no effect on total saving and no effect on capital accumulation.
D) total saving increases and capital accumulation increases.
E) no effect on total saving and capital accumulation increases.

Question 40

At the current steady state capital- labour ratio, assume that the steady state level of per capita consumption, (C/N)*, is less than the golden rule level of steady state per capita consumption. Given this information, we can be certain that:

A) An increase in the saving rate will cause an increase in the steady state level of per capita consumption ((C/N)*).
B) A decrease in the capital- labour ratio will cause a decrease in (C/N)*.
C) The capital- labour ratio will tend to increase over time.
D) A decrease in the saving rate will have an ambiguous effect on (C/N)*.
E) The capital- labour ratio will tend to decrease over time.

Question 41

For an economy in which there is no technological progress, explain what must occur for the steady state to occur. Also explain what this implies about the rate of growth of output, output per worker, and the capital stock.

Question 42

The main macroeconomic implication of a fully funded social security system is:

A) no effect on total saving and capital accumulation increases.
B) no effect on total saving and capital accumulation decreases.
C) no effect on total saving and no effect on capital accumulation.
D) total saving increases and no effect on capital accumulation.
E) total saving decreases and no effect on capital accumulation.

Question 43

Suppose policy makers wish to increase steady state consumption per worker. Explain what must happen to the saving rate to achieve this objective.

Question 44

Explain the difference between the Solow- Swan model and the endogenous growth model in terms of their views on the determinants of economic growth.

Question 45

Explain the relationship between output, saving, and investment.

Question 46

When the economy is in the steady state, we know with certainty that:

A) consumption per worker is maximised.
B) output per worker is maximised.
C) the saving rate is maximised.
D) the growth rate is maximised.
E) investment per worker equals depreciation per worker.

Question 47

Suppose the following situation exists for an economy: Kt+1/N = Kt/N. Given this information, we know that:

A) saving per worker is greater than depreciation per worker in period t.
B) the saving rate fell in period t.
C) saving per worker is less than depreciation per worker in period t.
D) saving state consumption is equal to the golden rule level of steady state consumption.
E) saving per worker equals depreciation per worker in period t.

Question 48

Suppose there is an increase in the saving rate. Explain what effect this will have on output, output per worker, the rate of growth of output, and the rate of growth of output per worker.

Question 49

Which of the following represents the effects in period t of an increase in the saving rate in period t?

A) A decrease in Y/N.
B) No change in K/N.
C) An increase in Y/N.
D) An increase in K/N.
E) A decrease in K/N.

Question 50

Graphically illustrate and explain the effects of an increase in the saving rate on the Solow- Swan growth model. In your graph, clearly label all curves and equilibria.

Question 51

Suppose the saving rate is initially greater than the golden rule saving rate. We know with certainty that an increase in the saving rate will cause:

A) a decrease in consumption per worker.
B) a decrease in output per worker.
C) an increase in the rate of growth in the long run.
D) All of the above.
E) None of the above.

Question 52

A decrease in the saving rate will not affect which of the following variables in the long run?

A) Output per worker.
B) The level of investment.
C) The growth rate of output.
D) The total stock of capital in the economy.
E) Capital per worker.

Question 53

Explain what condition must occur for each of the following to occur: (1) the capital stock to increase; (2) the capital stock to decrease; and (3) the capital stock to remain constant.

Question 54

Suppose an economy experiences a decrease in the saving rate. As the economy adjusts to this, we would expect output per worker:

A) to decrease at a permanently higher rate.
B) to decrease at a high rate temporarily and the rate of decrease goes to zero in the steady state.
C) to decrease slower at the beginning, then faster, and then at a constant rate in the steady state.
D) to decrease at a constant rate and continue increasing at that rate in the steady state.
E) to first increase, then decrease at an increasing rate, then increase at a constant rate in the steady state.

Question 55

In the model where it is assumed that the state of technology does not change, what parameters and/or variables cause changes in steady state output per worker.

Question 56

Suppose the following situation exists for an economy: Kt+1/N = Kt/N. Given this information, we know with certainty that:

A) the rate of growth of output is positive in period t.
B) saving per worker is greater than depreciation per worker in period t.
C) saving per worker is less than depreciation per worker in period t.
D) investment per worker equals depreciation per worker in period t.
E) the economy is operating at the golden rule equilibrium in period t.

Question 57

If the saving rate is 1 , we know that:

A) K/N will be at its highest level.
B) C/N = 0.
C) Y/N will be at its highest level.
D) All of the above.
E) Only A and B.

Question 58

Explain what human capital is and discuss how changes in human capital can affect output per worker.

Question 59

The empirical evidence indicates that most OECD countries are far below their golden- rule level of capital. What are the practical limitations of raising the saving rate closer to the golden- rule level? How close to the golden rule should governments try to get? Why?

Question 60

Which of the following is not a flow variable?

A) Physical capital.
B) Saving.
C) Investment.
D) Output.
E) All of the above.

Question 61

Suppose the saving rate is greater than the golden rule saving rate (sG). First, explain what must happen to the saving rate in order to increase steady state consumption. Second, what are the advantages and disadvantages of this policy to increase steady state consumption.

Question 62

Graphically illustrate and explain the effects of an increase in the rate of depreciation on the Solow- Swan growth model. In your graph, clearly label all curves and equilibria.

Question 63

Suppose depreciation per worker is less than saving per worker. Given this situation, explain what will happen to each of the following variables over time: capital per worker, output per worker, saving per worker, and consumption per worker.