Deck 12: Growth Theory

Question 1

Which best explains the relationship between physical capital and the level of wealth in a country?

A) As countries become wealthier, they acquire more physical capital.
B) As countries acquire more physical capital, they become wealthier.
C) Wealthier countries invest less in physical capital.
D) Poor countries can only become wealthier if they acquire more physical capital.
E) A country does not need physical capital to increase wealth.

Answer 1

As countries become wealthier, they acquire more physical capital.

Question 2

In equation form, the production function for a single firm can be expressed as

A) q = fhuman capital, physical capital).
B) q= fprice of output, price of inputs).
C) q = flabor, price of inputs).
D) q = fprice of inputs, profit).
E) q =production cost, profit).

Answer 2

q = fhuman capital, physical capital).

Question 3

Economic models are

A) complex representations of reality.
B) not related to real-world observations.
C) used by teachers but not policymakers.
D) updated as new real-world data become available.
E) rarely reevaluated.

Answer 3

updated as new real-world data become available.

Question 4

If the production function in the Solow growth model is given by q =fhuman capital, physical capital), then in this model

A) there is no investment.
B) there is no labor.
C) labor is represented by the human capital variable.
D) there is no depreciation.
E) there is no economic growth.

Question 5

The main focus of the Solow growth model is

A) physical capital.
B) human capital.
C) institutions.
D) natural resources.
E) labor.

Question 6

Economic growth is determined by

A) the rate of inflation.
B) the size of the population.
C) geography.
D) cultural factors.
E) resources, technology, and institutions.

Question 7

According to modern growth theory, the key to economic growth is

A) paved roads.
B) modern buildings.
C) skilled labor.
D) a large pool of unskilled labor.
E) institutions.

Question 8

The relationship between the growth rate of real gross domestic product GDP) and the growth rate of real investment is

A) positive.
B) negative.
C) unpredictable.
D) nonexistent.
E) positive at low levels of real GDP and then negative at higher levels of GDP.

Question 9

Economic growth theory originated about 60 years ago as a result of contributions by

A) Robert Solow.
B) Adam Smith.
C) David Ricardo.
D) Alan Greenspan.
E) Ben Bernanke.

Question 10

Which of the following is true?

A) Economists formulate a theory and then sometimes try to verify the theory with real-world observations.
B) Real-world observations are used to formulate an economic theory, but this is of little use to policymakers.
C) Once an economic theory is developed, it is rarely tested against real-world observations.
D) When a policymaker has an idea about how to advance economic growth, he or she will ask an economist to formulate a theory, and then this will be compared to real-world observations.
E) Real-world observations motivate economists to formulate theories about how economic growth evolves, and these theories are then used and reevaluated as new data become available.

Question 11

A restaurant's production function would show the relationship between the

A) number of workers hired and the number of meals served.
B) number of workers hired and the level of profit.
C) level of profit and the number of meals served.
D) level of profit and the cost of producing the meals.
E) number of workers hired and the cost of producing the meals.

Question 12

According to modern growth theory, a country that wants to foster long-run economic growth and the accumulation of wealth should focus on

A) its institutions.
B) acquiring physical capital.
C) its supply of unskilled labor.
D) its educated workforce.
E) acquiring modern buildings.

Question 13

The graphical relationship between real gross domestic product GDP) and capital is called the

A) steady state.
B) capital function.
C) production function.
D) investment function.
E) marginal product curve.

Question 14

The aggregate production function describes the relationship between the total output in the economy and

A) physical capital, human capital, and natural resources.
B) total spending in the economy.
C) total income earned in the economy.
D) the inflation rate.
E) the unemployment rate.

Question 15

An example of physical capital is

A) a well-run government.
B) a well-developed banking system.
C) skilled labor.
D) paved roads.
E) educated teachers.

Question 16

Economic theories about growth

A) are mainly used for intellectual debate.
B) are mainly used for teaching.
C) are not based on real-world facts.
D) are used to set economic policies that impact human lives.
E) have had no influence on government policy.

Question 17

The early Solow model focused on

A) the skill level of workers.
B) the labor supply.
C) government policy.
D) the availability of capital goods.
E) institutions.

Question 18

The growth theory we study today was formulated

A) during the Great Depression.
B) during the 1970s.
C) during the 1950s.
D) in 1776 by the work of Adam Smith.
E) over 100 years ago.

Question 19

The production function describes the relationship between

A) inflation and unemployment in the economy.
B) the firm's inputs and outputs.
C) the levels of output and spending in the economy.
D) the aggregate supply and demand for goods in the economy.
E) the firm's output and the price level.

Question 20

Economic growth theory is based on

A) the Ricardian growth model.
B) the Solow growth model.
C) business cycle theory.
D) the theory of supply and demand.
E) the theory of investment.

Question 21

In the Solow growth model, human capital will increase if choose the best answer)

A) there are more workers.
B) workers are better educated.
C) there are more workers and existing workers become better educated and skilled.
D) real wages increase.
E) there is an increase in production.

Question 22

The marginal product of an input is defined as the

A) change in output.
B) change in output divided by the change in input.
C) change in input.
D) total output divided by the total inputs.
E) cost of the input.

Question 23

Human capital relates to ________ and physical capital relates to ________.

A) people; buildings
B) firms; people
C) education; money
D) money; buildings
E) output; money

Question 24

In a population, the size of the labor force shrinks but a greater percentage of the labor force has a college degree. We can expect the human capital input to

A) be unaffected.
B) increase.
C) decrease.
D) first increase and then decrease.
E) increase or decrease depending on which change has a larger impact.

Question 25

Bob owns and manages an apple orchard. In Bob's business, an example of human capital would be

A) a ladder.
B) the time spent by the workers picking apples.
C) the apple trees.
D) the amount of fertilizer used on the trees.
E) the boxes used to store the apples.

Question 26

The Solow model emphasizes

A) the development of institutions.
B) capital and diminishing returns.
C) the importance of skilled labor.
D) technological change.
E) cultural factors.

Question 27

Consider the data in the following table. $$\begin{array} { l c c } \hline \text { Year } & \begin{array} { c } \text { Growth Rate of } \\\text { Real Investment }\end{array} & \begin{array} { c } \text { Growth Rate } \\\text { of Real GDP }\end{array} \\\hline 1 & - 3 \text { percent } & 2 \text { percent } \\2 & - 1 \text { percent } & - 1 \text { percent } \\3 & 1 \text { percent } & - 2 \text { percent } \\4 & 4 \text { percent } & - 2 \text { percent } \\5 & 0 \text { percent } & - 1 \text { percent } \\\hline\end{array}$$ Do the data match the experience of a developed country like the United States?

A) Yes, because the two growth rates are positively correlated.
B) No, because the two growth rates should be positively correlated.
C) Yes, because the two growth rates are negatively correlated.
D) No, because the two growth rates should be negatively correlated.
E) Yes, because these two growth rates are unrelated.

Question 28

Bob owns and manages an apple orchard. In Bob's business, an example of physical capital would be

A) a ladder.
B) the apple trees.
C) the water he uses on the trees.
D) the number of workers he hires to pick the apples.
E) Bob's level of education.

Question 29

Use the following graph to answer the next questions.

If net investment is positive, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there is an upward movement along the production function.
D) there is a downward movement along the production function.
E) there is an upward shift of the production function and an upward movement along the production function.

Question 30

Use the following graph to answer the next questions.

If this country experiences an epidemic that reduces human capital, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there will be an upward movement along the production function.
D) there will be a downward movement along the production function.
E) there will be no effect on the production function.

Question 31

When the marginal product of an input falls as the quantity of the input rises, this is known as

A) diminishing marginal product.
B) diminishing output.
C) diminishing production.
D) decreasing returns to scale.
E) inverse marginal product.

Question 32

In the Solow growth model, human capital measures

A) the number of workers.
B) the educational level of the workers.
C) the level of technology available to workers.
D) the labor input in terms of the physical number of workers and the knowledge and skills embodied in those workers.
E) how much firms spend to train workers.

Question 33

Use the following graph to answer the next questions.

If capital is increasing, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there is an upward movement along the production function.
D) there is a downward movement along the production function.
E) there is an upward shift of the production function and an upward movement along the production function.

Question 34

Diminishing marginal product is also known as

A) diminishing returns.
B) net investment.
C) depreciation.
D) investment.
E) the steady state.

Question 35

Country X has a higher growth rate of real investment than country Y. You might expect country X to have

A) a higher growth rate of real gross domestic product GDP).
B) the same growth rate of real gross domestic product GDP).
C) a lower growth rate of real gross domestic product GDP).
D) a lower level of net investment.
E) a lower level of depreciation.

Question 36

Use the following graph to answer the next questions.


If more natural resources are discovered, then

A) the production function will shift upward.
B) the production function will shift downward.
C) there will be an upward movement along the production function.
D) there will be a downward movement along the production function.
E) there will be no effect on the production function.

Question 37

The change in output divided by the change in input is defined as

A) marginal product.
B) average product.
C) diminishing returns.
D) labor productivity.
E) profit per unit output.

Question 38

Use the following graph to answer the next questions.


Consider a country that improves its educational system such that a greater percentage of workers become college educated. It is reasonable to expect

A) the production function will shift upward.
B) the production function will shift downward.
C) there will be an upward movement along the production function.
D) there will be a downward movement along the production function.
E) there will be no effect on the production function.

Question 39

Consider the data in the following table. $$\begin{array} { l c c } \hline \text { Year } & \begin{array} { c } \text { Growth Rate of } \\\text { Real Investment }\end{array} & \begin{array} { c } \text { Growth Rate } \\\text { of Real GDP }\end{array} \\\hline 1 & 0 \text { percent } & 2 \text { percent } \\2 & - 2 \text { percent } & - 3 \text { percent } \\3 & 3 \text { percent } & 5 \text { percent } \\4 & - 1 \text { percent } & 0 \text { percent } \\5 & 1 \text { percent } & 1 \text { percent } \\\hline\end{array}$$ Do the data match the experience of a developed country like the United States?

A) Yes, because the two growth rates are positively correlated.
B) No, because the two growth rates should be positively correlated.
C) Yes, because the two growth rates are negatively correlated.
D) No, because the two growth rates should be negatively correlated.
E) Yes, because these two growth rates are unrelated.

Question 40

In a population, not all workers have a high school diploma. Suppose the size of the labor force
increases but a smaller percentage of the labor force has a high school diploma. It is reasonable to
expect that the larger labor force will ________ the human capital input and the smaller percentage of
the labor force with a high school diploma will ________ the human capital input.

A) decrease; increase
B) decrease; decrease
C) increase; decrease
D) increase; have no effect on
E) increase; increase

Question 41

When firms buy new capital, it is called

A) investment.
B) net investment.
C) depreciation.
D) a steady state.
E) an unstable state.

Question 42

A key assumption of the Solow model is

A) increasing returns to labor and diminishing returns to capital.
B) diminishing returns to capital only.
C) diminishing marginal product of capital and labor.
D) diminishing marginal product of capital and increasing marginal product of labor.
E) constant marginal product of capital only.

Question 43

There are diminishing returns to

A) only human capital.
B) only physical capital.
C) only natural resources.
D) only human capital and physical capital.
E) human capital, physical capital, and natural resources.

Question 44

Consider the following table that shows the number of trucks owned by a delivery firm and the corresponding number of deliveries made. Use the table to answer the next questions. $$\begin{array} { l c } \hline \begin{array} { l } \text { Number of } \\\text { Trucks }\end{array} & \begin{array} { c } \text { Number of } \\\text { Deliveries }\end{array} \\\hline 0 & 1 \\1 & 20 \\2 & 30 \\3 & 36 \\4 & 38 \\5 & 38 \\\hline\end{array}$$

-The marginal product of the third truck is __________ deliveries.

A) 12
B) 6
C) 36
D) 15
E) 2

Question 45

Consider the following table that shows the number of trucks owned by a delivery firm and the corresponding number of deliveries made. Use the table to answer the next questions. $$\begin{array} { l c } \hline \begin{array} { l } \text { Number of } \\\text { Trucks }\end{array} & \begin{array} { c } \text { Number of } \\\text { Deliveries }\end{array} \\\hline 0 & 1 \\1 & 20 \\2 & 30 \\3 & 36 \\4 & 38 \\5 & 38 \\\hline\end{array}$$

-When the firm bought their last truck, they found that the number of deliveries increased by 10. In this case, they must have just bought truck number

A) five.
B) four.
C) three.
D) one.
E) two.

Question 46

When moving up along the production function, the marginal product of capital will

A) increase.
B) decrease.
C) first decrease and then increase.
D) first increase and then remain constant.
E) remain constant.

Question 47

Use the following production function to answer the next questions.

How many units of capital should be produced in order to achieve the steady state?

A) 6
B) 5
C) 4
D) 3
E) There is not enough information to answer this question.

Question 48

Consider the following table that shows the total number of acres plowed per hour as a function of the
number of tractors used is increased. Use this table to answer the next questions.
$\begin{array} { l c c } \hline \begin{array} { l } \text { Number of } \\\text { Tractors }\end{array} & \text { Total Acres } & \begin{array} { l } \text { Marginal } \\\text { Product }\end{array} \\\hline 0 & 50 & - \\1 & 200 & 150 \\2 & - & 120 \\3 & 420 & - \\4 & 480 & 60 \\5 & - & 20 \\\hline\end{array}$

-The total acres plowed when two tractors are used is

A) 470.
B) 300.
C) 310.
D) 320.
E) 350.

Question 49

Consider the following table, which shows the total number of customers served per hour as the number of cash registers is increased. $$\begin{array} { l l l } \hline \begin{array} { l } \text { Number of } \\\text { Cash Registers } \\\end{array} & \begin{array} { l } \text { Total } \\\text { Customers }\end{array} & \begin{array} { l } \text { Marginal } \\\text { Product }\end{array} \\\hline 0 & 5 & - \\1 & 20 & 15 \\2 & - & 12 \\3 & 42 & - \\4 & 48 & 6 \\5 & - & 2 \\\hline\end{array}$$ The marginal product of the third cash register is

A) 42.
B) 6.
C) 12.
D) 9.
E) 10.

Question 50

Use the following graph to answer the next questions.

The marginal product of the 5th unit of capital is ________ and the marginal product of the 10th unit
is ________.

A) 100; 180
B) 100; 80
C) 10; 8
D) 20; 18
E) 20; 16

Question 51

Use the following production function to answer the next questions.

This production function exhibits diminishing returns to capital for

A) all units of capital after the first.
B) no units of capital.
C) all units of capital after the second.
D) all units of capital after the third.
E) all units of capital except the sixth.

Question 52

When the value of a resource declines over time, this is known as

A) depreciation.
B) the steady state.
C) diminishing returns.
D) diminishing marginal product.
E) net loss.

Question 53

The marginal product of an input is

A) always positive.
B) never positive.
C) usually positive.
D) always decreasing.
E) always increasing.

Question 54

Use the following graph to answer the next questions.

The marginal product of the 15th unit of capital is

A) negative.
B) greater than the 10th unit.
C) the same as the 10th unit.
D) less than the 10th unit.
E) zero.

Question 55

Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of
physical capital. All else the same, real gross domestic product (GDP) will ________ in the short run,
and real GDP will ________ in the long run.

A) decline; be permanently lower
B) decline; return to the steady state level
C) be unchanged; decline
D) increase; decrease
E) decline; end up higher than the original level

Question 56

When the amount of physical capital is increased, then all else the same, the marginal product of capital will

A) increase.
B) decrease.
C) remain unchanged.
D) eventually decrease.
E) eventually increase.

Question 57

As additional units of an input are employed, the marginal product of the input is

A) always increasing.
B) always decreasing.
C) constant.
D) eventually increasing.
E) eventually decreasing.

Question 58

It is reasonable to expect that as the amount of physical capital is increased, the amount of output produced will

A) increase at a constant rate.
B) increase at a diminishing rate.
C) increase at an increasing rate.
D) decrease.
E) be unaffected.

Question 59

When ________ units of capital are purchased, the marginal product will ________.

A) more; increase
B) more; not change
C) more; decrease
D) fewer; decrease
E) fewer; not change

Question 60

Use the following production function to answer the next questions.

This production function exhibits

A) diminishing marginal product.
B) constant marginal product.
C) increasing marginal product.
D) increasing returns to capital.
E) a constant rate of depreciation.

Question 61

In the economy, the level of capital will increase if

A) depreciation is zero.
B) investment is positive.
C) investment is larger than net investment.
D) net investment is larger than investment.
E) net investment is positive.

Question 62

When a firm buys a new computer ________ increases, and when the firm gets rid of old computers
________ decreases.

A) investment; investment
B) net investment; net investment
C) capital; capital
D) investment; depreciation
E) depreciation; investment

Question 63

A company has three delivery trucks. Each month the trucks require repairs to keep them in good working order. Which of the following is true?

A) Investment is equal to zero.
B) Net investment is equal to zero.
C) The company is not in a steady state.
D) Capital is increasing.
E) Capital is decreasing.

Question 64

A firm has 50 computers. Every year, they buy 3 new ones and get rid of 3 old ones. In this case,
investment is equal to ________ and net investment is equal to ________.

A) 3; 3
B) 3; 0
C) 3; -3
D) 6; 3
E) 3; 6

Question 65

An economy is in the steady state if

A) investment equals depreciation.
B) investment equals zero.
C) net investment equals depreciation.
D) capital grows at a constant rate.
E) there are no diminishing returns.

Question 66

An economy is in a steady state if

A) depreciation is zero.
B) investment is zero.
C) net investment is positive.
D) capital and output are not changing.
E) there are diminishing returns.

Question 67

Suppose that the level of capital in the economy is 100 units, the depreciation rate is 5 percent, and investment is equal to 10 units. In this case,

A) the level of capital will increase.
B) the economy is in a steady state.
C) the level of capital will decrease.
D) the level of output will decrease.
E) investment is less than net investment.

Question 68

When is net investment equal to investment?

A) never
B) only if depreciation is zero
C) always
D) if the economy is in a steady state
E) whenever the economy is not in a steady state

Question 69

Suppose a major hurricane hits the eastern coast of Florida and destroys significant amounts of physical capital. Considering the production function that illustrates the relationship between real GDP and capital, in the long run, you would expect that

A) the production function will have shifted upward.
B) the production function will have shifted downward.
C) the production function will have shifted back to its original position after having shifted downward in the short run.
D) there has been a permanent downward movement along the production function.
E) there has been no effect on the production function and real gross domestic product GDP) returns to the steady state level.

Question 70

If an economy is in the steady state, then

A) net investment is zero.
B) depreciation is zero.
C) investment is zero.
D) the marginal product of capital is zero.
E) there are no diminishing returns.

Question 71

As a country approaches the steady state, the returns to capital

A) increase.
B) decrease.
C) turn negative.
D) become equal to zero.
E) are unaffected.

Question 72

Depreciation is

A) the wearing out of capital over time.
B) the reduction of investment over time.
C) the decline of output over time.
D) the tendency of economies to converge to the same output level.
E) what happens when technology does not advance.

Question 73

A firm has a total of 25 workstations in four different office buildings. This year it builds 3 new workstations and gets rid of 5 old ones. In this case, investment is equal to ________ and net investment is equal to ________.

A) 3; 5
B) 3; -2
C) 3; 2
D)5; 3
E) 2;-2

Question 74

Suppose that the level of capital in the economy is 200 units, the depreciation rate is 10 percent, and the level of investment is equal to 10 units. In this case,

A) the economy is in a steady state.
B) investment is less than net investment.
C) investment is equal to net investment.
D) investment is greater than net investment.
E) the level of output will increase.

Question 75

A firm has 100 computers, and each year 5 of them become obsolete and must be recycled. This firm is in a steady state if investment each year is equal to

A) 0.
B) 5.
C) 1.
D) 100.
E) 95.

Question 76

As a nation approaches its steady state, the returns to capital ________ and the growth of real gross
domestic product (GDP) ________.

A) increase; increases
B) decrease; slows down
C) increase; slows down
D) decrease; increases
E) remain unchanged; remains unchanged

Question 77

A lawn service company has 20 lawn mowers. This year they buy 3 new ones and get rid of 2 old ones. In this case, investment is equal to ________ and net investment is equal to ________.

A) 3; 3
B) 3; 1
C) 3; 2
D) 5; 3
E) 3; 5

Question 78

According to the Solow growth model, advanced economies with large stocks of capital will

A) eventually stop growing.
B) continue to grow at a constant rate.
C) always have levels of real gross domestic product GDP) that are higher than the less advanced economies.
D) all converge to the same level of real gross domestic product GDP).
E) never reach a steady state.

Question 79

The economy tends to approach a steady state because

A) there is a shortage of skilled workers.
B) people run out of new ideas.
C) there are diminishing returns.
D) government policies inhibit further growth.
E) there is depreciation.

Question 80

Suppose that in the economy the level of capital is 500 units, the depreciation rate is 4 percent, and the level of investment is 20 units. In this case,

A) net investment is negative.
B) net investment is positive.
C) the level of output will decrease.
D) the level of capital will increase.
E) the economy is in a steady state.