Deck 8: Growth, Capital Accumulation and the Economics of Ideas: Catching up Vs the Cutting Edge

Question 1

In 2010, China's GDP per capita grew by approximately:

A) 7%.
B) 8%.
C) 9%.
D) 10%.

Answer 1

10%.

Question 2

An economy with production function Y = F(K) = $\sqrt { K }$ that has 400 units of capital will produce _____ units of output.

A) 1,600
B) 400
C) 40
D) 20

Answer 2

20

Question 3

Catching-up growth is growth due to:

A) capital accumulation.
B) new ideas.
C) new human capital.
D) improving the organization of existing resources.

Answer 3

capital accumulation.

Question 4

Countries on the "cutting edge" grow primarily by:

A) adopting ideas already used by other countries.
B) capital accumulation.
C) developing new ideas.
D) eliminating waste and inefficiency.

Question 5

The production function is a mathematical function that shows:

A) the most cost-efficient means of producing output.
B) the relationship between output and the factors of production.
C) how various inputs are produced.
D) the most efficient level of output produced in an economy.

Question 6

Cutting-edge growth is growth due to:

A) capital accumulation.
B) new ideas.
C) new human capital.
D) improving the organization of existing resources.

Question 7

The two types of economic growth are:

A) ultimate and immediate.
B) progressive and regressive.
C) fast and slow.
D) cutting-edge and catching-up.

Question 8

In 2010, U.S. GDP per capita grew by approximately:

A) 1.2%.
B) 2.2%.
C) 3.2%.
D) 4.2%.

Question 9

In the Solow model production function, Y = F(A, K, eL), L stands for:

A) labor.
B) leisure.
C) liquidity.
D) long run.

Question 10

In the Solow model production function, Y = F(A, K, eL), A stands for:

A) aggregate demand.
B) assets.
C) attitude.
D) ideas.

Question 11

In 2010, GDP per capita in the United States grew by 2.2%. In the same year, GDP per capita in China grew by almost:

A) 2%.
B) 5%.
C) 7%.
D) 10%.

Question 12

Imagine an economy with production function Y = F(K) = $\sqrt { K }$ and 400 units of capital. If the fraction of output invested in new capital is $\gamma$ = 0.2, how much new capital will be created in the next period?

A) 2
B) 4
C) 6
D) 8

Question 13

Imagine an economy with production function Y = F(K) = $\sqrt { K }$ and 400 units of capital. If the depreciation rate is $\delta$ = .05, how much capital will deteriorate in the next period?

A) 4 units
B) 8 units
C) 16 units
D) 20 units

Question 14

The "A" term in the production function Y = F(A, K, eL) represents which factor of production in the Solow growth model?

A) physical capital
B) human capital
C) technological knowledge
D) organization of resources

Question 15

In the Solow model production function, Y = F(A, K, eL), eL stands for:

A) efficiency.
B) liquidity.
C) elasticity.
D) human capital.

Question 16

In the Solow model production function, Y = F(A, K, eL), K stands for:

A) kurtosis.
B) consumption.
C) physical capital.
D) human capital.

Question 17

Which is NOT a key institution for economic growth?

A) property rights
B) honest government
C) political stability
D) income equality

Question 18

Countries on a "catching-up" growth path are growing primarily through:

A) capital accumulation.
B) new technological knowledge.
C) new ideas.
D) foreign aid.

Question 19

In recent years, real GDP in China has grown:

A) at about the same rate as real GDP in the United States.
B) much faster than real GDP in the United States.
C) much slower than real GDP in the United States.
D) faster than real GDP in the United States in some years, slower than real GDP in the United States in other years.

Question 20

The Solow growth model features _____ returns to physical capital.

A) decreasing
B) constant
C) increasing
D) no

Question 21

In the Solow model, if a country's depreciation rate ( $\delta$ ) increased from 1% to 2% and it was operating at its steady state before the change, we would expect to see:

A) a decrease in both the capital stock and output.
B) a decrease in the capital stock only.
C) a decrease in output only.
D) an increase in both the capital stock and output.

Question 22

In the Solow model, if a country's saving rate ( $\gamma$ ) increased from 10% to 12% and it was operating at its steady state before the change, we would expect to see:

A) a decrease in both the capital stock and output.
B) an increase in the capital stock only.
C) an increase in output only.
D) an increase in both the capital stock and output.

Question 23

As more units of capital are added in the Solow model, output:

A) increases at an increasing rate.
B) increases at a constant rate.
C) increases at a decreasing rate.
D) remains constant.

Question 24

The marginal product of capital is the increase in:

A) employment when one more unit of capital is added.
B) unemployment when one more unit of capital is added.
C) output when one more unit of capital is added.
D) the number of machines when one more unit of capital is added.

Question 25

The Solow model is based on:

A) a production function.
B) supply and demand curves.
C) the GDP accounts.
D) consumer preferences.

Question 26

Imagine an economy with production function Y = F(K) = $\sqrt { K }$ and 400 units of capital. If the fraction of output invested in new capital is $\gamma$ = 0.2 and the depreciation rate is $\delta$ = .05, how much total capital will be available in the next period?

A) 380 units
B) 384 units
C) 400 units
D) 404 units

Question 27

Imagine an economy with production function Y = F(K) = $\sqrt { K }$ and 400 units of capital. If the fraction of output invested in new capital is $\gamma$ = 0.2, the depreciation rate is $\delta$ = .05, and the economy starts with output of 20, what does the Solow model predict will happen to output in the long run?

A) It will remain at 20.
B) It will decline.
C) It will increase.
D) It will increase for a time and then return to 20.

Question 28

In the Solow model, if the first unit of capital increases output by one unit, then the second unit of capital will cause total output to:

A) increase, but by less than one unit.
B) increase by more than one unit.
C) remain the same.
D) decrease.

Question 29

Consider the following production function: Y = F(K) = $\sqrt { K }$ . When the capital stock is 144, output is:

A)12.
B)24.
C)72.
D)144.

Question 30

As more units of capital are added in the Solow model, the marginal product of capital:

A) increases.
B) decreases at first, then increases.
C) decreases.
D) remains constant.

Question 31

Diminishing returns to capital implies that _____ diminishes as more capital is added.

A) output
B) the marginal product of capital
C) the cost of producing goods and services
D) technological knowledge

Question 32

According to the Solow model, output is a function of the quantity of:

A) labor.
B) capital.
C) ideas.
D) labor, capital, and ideas.

Question 33

If we hold ideas, education, and labor constant in the Solow model, then output (GDP) is a function of:

A) human capital only.
B) physical capital only.
C) labor only.
D) technological knowledge only.

Question 34

Which would decrease national output?

A) a new idea to improve the production process
B) a natural disaster that destroys some capital
C) an increase in human capital
D) an increase in labor

Question 35

_____ first developed the model that explains economic growth using a production function.

A) Milton Friedman
B) Robert Solow
C) John Maynard Keynes
D) Ben Bernanke

Question 36

Imagine an economy with production function Y = F(K) = $\sqrt { K }$ and 400 units of capital. If the fraction of output invested in new capital is $\gamma$ = 0.2 and the depreciation rate is $\delta$ = .05, what is the steady-state amount of capital?

A) 16 units
B) 64 units
C) 100 units
D) 225 units

Question 37

In the Solow model, an increase in the capital stock with all other variables held constant will _____ the country's real GDP but at a(n) _____ rate.

A) increase; decreasing
B) decrease; decreasing
C) increase; increasing
D) decrease; increasing

Question 38

Imagine an economy with production function Y = F(K) = $\sqrt { K }$ and 400 units of capital. If the fraction of output invested in new capital increases from $\gamma$ = 0.2 to $\gamma$ = 0.5 and the depreciation rate is $\delta$ = .05, what is the new steady-state amount of capital?

A) 16 units
B) 64 units
C) 100 units
D) 256 units

Question 39

The increase in output caused by the addition of one more unit of capital is called:

A) the average product.
B) total product.
C) the production function.
D) the marginal product of capital.

Question 40

A production function can be used to express the relationship between _____ and GDP.

A) GDP per capita
B) productivity
C) the factors of production
D) an economy's growth rate

Question 41

Which statement best explains why growth in China has been so rapid recently?

A) China began with very little capital, so its marginal product of capital was very high.
B) China began with very little capital, so its marginal product of capital was very low.
C) China began with very high capital, so its marginal product of capital was very high.
D) China began with very high capital, so its marginal product of capital was very low.

Question 42

The principle of diminishing returns to capital implies that a country that loses much of its capital during a war will:

A) experience a slower growth rate than before the war.
B) never catch up to its level of output before the war.
C) never be able to replace the capital lost during the war.
D) experience a faster growth rate than before the war.

Question 43

Following World War II, Japan and Germany grew rapidly because:

A) each country had a lot of capital that survived the war.
B) each country's new capital was highly productive after the war.
C) postwar institutions were not effective.
D) little rebuilding was required at the end of the war.

Question 44

Diminishing returns to capital implies that:

A) the marginal product of capital is decreasing.
B) more capital produces less output.
C) the production function is downward sloping.
D) capital is not the most efficient input.

Question 45

Which statement is NOT an explanation for why Germany and Japan both grew faster than the United States following World War II?

A) Both countries had very little capital stock remaining after the war.
B) Both countries had a high marginal product of capital after the war.
C) Both countries had strong incentive to put new capital stock into place.
D) Both countries were experiencing cutting-edge growth at the time.

Question 46

As a city rebuilds after a hurricane destroys most of its physical capital, we would expect growth in this locale to be:

A) higher than average in both the short run and long run.
B) lower than average in both the short run and long run.
C) higher than average in the short run, but return to normal levels in the long run.
D) lower than average in the short run, but eventually rise above average in the long run.

Question 47

The 2003 Iraq War destroyed large amounts of capital. Later, insurgent activity continued to destroy capital and created instability in the government. Today, hostilities have waned and the government has become more stable. According to the Solow growth model, over the next few years we would expect to see growth rates in Iraq _____ those of high-income countries with similar institutions, followed by growth rates that are _____ the growth rates in those countries.

A) higher than; much higher than
B) lower than; similar to
C) higher than; similar to
D) similar to; lower than

Question 48

Based on the nature of China's growth in recent years, it is likely that its growth rate will _____ in coming years.

A) increase
B) decrease
C) remain about the same
D) turn negative

Question 49

Countries that have been bombed extensively in a war typically have _____ marginal product of capital in the aftermath of conflict.

A) a lower
B) a higher
C) an unchanged
D) a zero

Question 50

Recent growth in China has been driven primarily by:

A) capital accumulation.
B) developing new technology.
C) foreign aid.
D) improving the organization of existing resources.

Question 51

Which statement is NOT a reason for high growth rates in Germany and Japan following World War II?

A) Good institutions were in place soon after the war.
B) Both countries had higher growth rates than the United States before World War II.
C) New capital was highly productive during the rebuilding process.
D) The incentive to invest in capital was very high after the war.

Question 52

Use the following to answer question : (Figure: Four Production Functions)
Refer to the figure. Which of these production functions exhibits diminishing returns?

A) A
B) B
C) C
D) D

Question 53

Diminishing returns to tractors indicates that:

A) having more tractors does not always lead to more output.
B) having more tractors leads to increases in output only if there are corresponding increases in technology.
C) additional output may be produced with fewer tractors.
D) having more tractors leads to more output, but at a decreasing rate.

Question 54

Recent rapid growth in China is primarily due to:

A) a high marginal product of capital that will eventually decrease as the country grows.
B) a high marginal product of capital that will continue to grow as the country grows.
C) the development of new technology that has increased productivity.
D) increases in human capital that have significantly increased the marginal product of labor.

Question 55

The marginal product of capital in China is _____ relative to the marginal product of capital in developed economies.

A) high
B) moderate
C) low
D) zero

Question 56

Countries that have been bombed extensively in a war often experience _____ growth rate in the aftermath of the conflict.

A) a lower
B) a higher
C) an unchanged
D) a zero

Question 57

Germany and Japan's rapid growth following the end of World War II is an example of:

A) indirect growth.
B) cutting-edge growth.
C) catching-up growth.
D) increasing returns to capital.

Question 58

Economists speculate that China's rapid growth will eventually slow as:

A) its excess labor supply becomes exhausted.
B) its capital stock rises.
C) other countries catch up to China.
D) economies of scale diminish.

Question 59

Capital growth is equal to investment _____ depreciation.

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

Question 60

Since the death of Chairman Mao in 1976, China has moved toward:

A) a more communist society.
B) more communal manufacturing.
C) more market-based production.
D) a more closed economy.

Question 61

If the depreciation rate is .03 and the capital stock is 200, how many units of capital will depreciate this period?

A) 2 units
B) 3 units
C) 6 units
D) 12 units

Question 62

Depreciation refers to the:

A) loss of capital because of technological change.
B) underuse of capital because of a reduced workforce.
C) wear and tear on capital through normal use.
D) underuse of capital because of inefficiency.

Question 63

In the Solow model with constant technological knowledge (A), if investment exceeds depreciation:

A) economic growth will occur.
B) economic decline will occur.
C) the economy will remain at its current output level.
D) depreciation will cause the capital stock to decline.

Question 64

In the Solow model with constant technological knowledge (A), if investment equals depreciation:

A) economic growth will occur.
B) economic decline will occur.
C) the economy will remain at its current output level.
D) depreciation will cause the capital stock to decline.

Question 65

Consider a small country with a capital stock equal to 900 units. This year it produced 20 units of new capital goods, with a depreciation rate of 20% and a production function of Y = K^1/2. What will its capital stock be next year?

A) 920 units
B) 720 units
C) 740 units
D) 900 units

Question 66

In a steady state, the level of investment:

A) exceeds depreciation.
B) is equal to depreciation.
C) is less than depreciation.
D) could be equal to, greater than, or less than depreciation.

Question 67

When investment exceeds depreciation, the capital stock:

A) falls and output falls.
B) falls and output rises.
C) rises and output falls.
D) rises and output rises.

Question 68

In the Solow model with constant technological knowledge (A), if the economy is initially above its steady-state capital stock:

A) economic growth will occur.
B) economic decline will occur.
C) the economy will remain at its current output level.
D) investment will cause the capital stock to increase.

Question 69

In a steady state, output is:

A) growing.
B) declining.
C) constant.
D) zero.

Question 70

If output in an economy is 500 and the investment function is 0.25Y, then:

A) 125 units of output are being consumed.
B) 375 units of output are being consumed.
C) 100 units of output are being consumed.
D) 400 units of output are being invested.

Question 71

If output in an economy is 20 and the investment function is 0.25Y, then:

A) 16 units of output are being consumed.
B) 25 units of output are being invested.
C) 15 units of output are being consumed.
D) 20 units of output are being invested.

Question 72

In a steady state, the capital stock:

A) increases.
B) decreases.
C) neither increases nor decreases.
D) equals zero.

Question 73

Capital growth is the difference between:

A) investment and economic growth.
B) investment and depreciation.
C) depreciation and economic growth.
D) investment and saving.

Question 74

The level of capital stock increases when investment in physical capital is:

A) greater than depreciation.
B) less than depreciation.
C) greater than personal consumption.
D) greater than investment in human capital.

Question 75

The steady-state capital stock is the capital stock where:

A) investment exceeds depreciation.
B) investment equals depreciation.
C) investment is less than depreciation.
D) depreciation equals zero.

Question 76

In the Solow model with constant technological knowledge (A), if depreciation exceeds investment:

A) economic growth will occur.
B) economic decline will occur.
C) the economy will remain at its current output level.
D) depreciation will cause the capital stock to decline.

Question 77

Use the following to answer question 63:
Figure: Production Function 1
(Figure: Production Function 1) Refer to the figure. In this diagram of the Solow model, if output is 600, consumption equals:

A)50.
B)200.
C)400.
D)600.

Question 78

In the Solow model with constant technological knowledge (A), if the economy is initially below its steady-state capital stock:

A) catching-up growth will occur.
B) cutting-edge growth will occur.
C) there will be no growth.
D) both catching-up and cutting-edge growth occurs.

Question 79

In the Solow model with constant technological knowledge (A), if the economy is initially below its steady-state capital stock:

A) economic growth will occur.
B) economic decline will occur.
C) the economy will remain at its current output level.
D) depreciation will cause the capital stock to decline.

Question 80

In the Solow model with constant technological knowledge (A), when the economy reaches a steady state:

A) catching-up growth occurs.
B) cutting-edge growth occurs.
C) growth stops.
D) both catching-up and cutting-edge growth occur.