Deck 9: Introduction to Economic Fluctuations

Question 1

If the marginal product of capital net of depreciation equals 10 percent and the rate of population growth equals 2 percent, then this economy will be at the Golden Rule steady state if the rate of technological progress equals percent.

A)0
B)2
C)8
D)10

Answer 1

C

Question 2

With population growth at rate n and labor-augmenting technological progress at rate g, the Golden Rule steady state requires that the marginal product of capital (MPK):

A)net of depreciation be equal to n + g.
B)net of depreciation be equal to the depreciation rate plus n + g.
C)plus n be equal to the depreciation rate plus g.
D)plus g be equal to the depreciation rate plus n.

Answer 2

A

Question 3

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, total output grows at a percent rate.

A)0
B)2
C)3
D)5

Answer 3

D

Question 4

In a steady-state economy with population growth n and labor-augmenting technological progress g, persistent increases in standards of living are possible because the:

A)capital stock grows faster than does the labor force.
B)capital stock grows faster than does the number of effective
C)workers. rate of depreciation constantly decreases.
D)saving rate constantly increases.

Question 5

Other things being equal, all of the following government policies are likely to increase national saving except:

A)decreasing taxes on savings accounts.
B)running a budget deficit.
C)running a budget surplus.
D)retiring part of the national debt.

Question 6

If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate:

A)will be at a lower level than in the steady state of the high-saving economy.
B)will be at a higher level than in the steady state of the high-saving economy.
C)will be at the same level as in the steady state of the high-saving economy.
D)will grow at a slower rate than in the high-saving economy.

Question 7

In the Solow model with technological progress, the steady-state growth rate of total output is:

A)0.
B)g.
C)n.
D)n + g.

Question 8

The Solow model predicts that two economies will converge if the economies start with the same:

A)capital stocks.
B)populations.
C)steady states.
D)production functions.

Question 9

In the Solow growth model with population growth and technological change, the break-even level of investment must cover:

A)depreciating capital.
B)depreciating capital and capital for new workers.
C)depreciating capital and capital for new effective workers.
D)depreciating capital, capital for new workers, and capital for new effective workers.

Question 10

International differences in income per person in accounting terms must be attributed to differences in either and/or .

A)factor accumulation; production efficiency.
B)constant returns to scale; the marginal product of.
C)capital unemployment rates; depreciation rates.
D)consumption; interest rates.

Question 11

In the Solow model with technological progress, by increasing the efficiency of labor at rate g:

A)the real wage and the real rental price of capital both grow at rate g.
B)the real wage grows at rate g but the real rental price of capital is constant.
C)the real wage is constant but the real rental price of capital grows at rate
D)g. both the real wage and the real rental price of capital are constant

Question 12

In a steady-state economy with a saving rate s, population growth n, and labor-augmenting technological progress g, the formula for the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f(k*)), is (denoting the depreciation rate by δ):

A)sf(k)/(δ + n + g).
B)s/((f(k))( δ + n + g)).
C)f(k)/((s)( δ + n + g)).
D)(s - f(k))/( δ + n + g).

Question 13

Hypotheses to explain the positive correlation between factor accumulation and production efficiency include each of the following except:

A)the quality of a nation's institutions influences both factor accumulation and production
B)efficiency. capital accumulation causes greater production efficiency.
C)efficient economies make capital accumulation unnecessary.
D)an efficient economy encourages capital (including human capital) accumulation.

Question 14

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, output per actual worker grows at a percent rate.

A)0
B)2
C)3
D)5

Question 15

International data suggest that economies of countries with different steady states will converge to: Athe same steady state.
B)their own steady state.
C)the Golden Rule steady state.
D)steady states below the Golden Rule level.

Question 16

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, output per effective worker grows at a percent rate.

A)0
B)2
C)3
D)5

Question 17

If the marginal product of capital net depreciation equals 8 percent, the rate of growth of population equals 2 percent, and the rate of labor-augmenting technical progress equals 2 percent, to reach the Golden Rule level of the capital stock, the rate in this economy must be .

A)saving; increased.
B)population growth; decreased
C)depreciation; decreased
D)total output growth; decreased

Question 18

In the Solow growth model with population growth and technological change, the steady-state growth rate of income per person depends on:

A)the rate of population growth.
B)the saving rate.
C)the rate of technological progress.
D)the rate of population growth plus the rate of technological progress.

Question 19

In the Solow model with technological progress, the steady-state growth rate of capital per effective worker is:

A)0.
B)g.
C)n.
D)n + g.

Question 20

In the Solow model with technological progress, the steady-state growth rate of output per effective worker is:

A)0.
B)g.
C)n.
D)n + g.

Question 21

Two countries, Highland and Lowland, are described by the Solow growth model. Both countries are identical, except that the rate of labor-augmenting technological progress is higher in Highland than in Lowland.
a. In which country is the steady-state growth rate of output per effective worker higher?
b. In which country is the steady-state growth rate of total output higher?
c. Does the Solow growth model predict that the two economies will converge to the same steady state?

Question 22

Based on the Solow growth model with population growth and labor-augmenting technological progress, explain how each of the following policies would affect the steady-state level and steady-state growth rate of total output per person:
a. a reduction in the government's budget deficit
b. grants to support research and development
c. tax incentives to increase private saving
d. greater protection of private property rights

Question 23

Explain how the Solow growth model differs from models of endogenous growth with respect to:
a. the sources of technological progress.
b. returns to capital.

Question 24

English-style legal systems give protections to shareholders and creditors than French Napoleonic Codes, typically resulting in capital markets and faster rates of economic growth.

A)greater; more.
B)developed greater; more.
C)corrupt less; more
D)developed less; less corrupt

Question 25

A possible externality associated with the process of accumulating new capital is that:

A)a reduction in labor productivity may occur.
B)new production processes may be devised.
C)old capital may be made more productive.
D)the government may need to adopt an industrial policy.

Question 26

Increases in the rate of growth of income per person in the United States in the mid-1990s is mostly likely the result of:

A)increases in human capital.
B)increases in physical capital.
C)advances in information technology.
D)an increase in the saving rate.

Question 27

Suppose that technological change is not labor-augmenting, but affects only capital. Use the Solow growth model of Chapter 9 to graphically illustrate the impact of the slower rate of technological change that increases the rate at which capital wears out (the rate of depreciation increases) on the steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction curves shift.

Question 28

In the two-sector endogenous growth model, the fraction of labor in universities (u) affects the steady-state:

A)level of income.
B)growth rate of income.
C)level of income and growth rate of income.
D)level of income, growth rate of income, and growth rate of the stock of knowledge.

Question 29

In the two-sector endogenous growth model, income growth persists because:

A)the production function shifts exogenously.
B)the saving rate exceeds the rate of depreciation.
C)the creation of knowledge in universities never slows down.
D)the fraction of the labor force in universities is large.

Question 30

The type of legal system and the level of corruption in a country have been found to be:

A)unrelated to the rate of economic growth in a country.
B)significant determinants of the rate of economic growth in a country.
C)important topics for political discussion, but not economic explanations of
D)growth. important variables explaining the Golden Rule level of capital.

Question 31

The productivity slowdown that began in the 1970s has been attributed, at least partly, to each of the following except:

A)running out of new ideas about how to produce.
B)a deterioration in the quality of education.
C)a decline in the number of workers in the labor force.
D)a lower average level of experience among workers.

Question 32

Empirical results justify substantial government subsidies to research based on the finding that the:

A)the private return to research is greater than the social return to research.
B)the private return to research is approximately equal to the social return to research.
C)the private return to research is less than the social return to research.
D)the private return to research is positive, but the social return to research is negative.

Question 33

Suppose Congress passes significant tax cuts on household income but does not reduce spending, so that the government budget deficit is larger. Use the Solow growth model of Chapter 9 to graphically illustrate the impact of the tax cut on the steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction curves shift.

Question 34

If productivity growth in the United States had remained at its level before the recent productivity slowdown, real income today would be more than percent higher.

A)10
B)20
C)30
D)40

Question 35

Public policies in the United States designed to stimulate technological progress do not include:

A)tax breaks to encourage homeownership.
B)the temporary monopoly granted by the patent system.
C)tax breaks for research and development.
D)subsidies given by the National Science Foundation.

Question 36

Schumpeter's thesis of "creative destruction" is an explanation of economic progress resulting from: A

A)using up scarce natural resources to create new products.
B)breaking down barriers to trade and development.
C)new product producers driving incumbent producers out of business.
D)creating new methods to destroy the environment.

Question 37

Suppose a government is able to permanently reduce its budget deficit. Use the Solow growth model of Chapter 9 to graphically illustrate the impact of a permanent government deficit reduction on the steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction curves shift.

Question 38

The recent worldwide slowdown in economic growth began in the early:

A)1960s.
B)1970s.
C)1980s.
D)1990s.

Question 39

Suppose a government is able to impose controls that limit the number of children people can have. Use the Solow growth model of Chapter 9 to graphically illustrate the impact of the slower rate of population growth on the
steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction curves shift.

Question 40

Assume that a country's production function is Y = AK^0.3L^0.7. The ratio of capital to output is 3, the growth rate of output is 3 percent, and the depreciation rate is 4 percent. Capital is paid its marginal product.
a. What is the marginal product of capital in this situation? (Hint: The marginal product of capital may be computed using calculus by differentiating the production function and using the capital-output ratio or by using the fact that capital's share equals MPK multiplied by K divided by Y.)
b. If the economy is in a steady state, what must be the saving rate? (Hint: The saving rate multiplied by Y
must provide for gross growth of (δ + n + g)K, where δ is the depreciation rate.)
c. If the economy decides to achieve the Golden Rule level of capital and actually reaches it, what will be the marginal product of capital?
d. What must the saving rate be to achieve the Golden Rule level of capital?

Question 41

What is the difference between convergence and conditional convergence with respect to predictions of the Solow growth model? Explain.

Question 42

The economy of Macroland can be described by the Solow growth model. In Macroland the labor force grows at 3 percent per year, labor-augmenting technology increases at 2 percent per year, the saving rate is 15 percent per year, and the rate of capital depreciation is 10 percent per year. Choosing from among the following variables-output per effective worker, output per worker, total output, labor force, capital per worker, and capital per effective worker-which variables will be growing at a:
a. 2 percent rate?
b. 3 percent rate?
c. 5 percent rate?
d. 0 percent rate?

Question 43

What is the Solow residual?
b. Compare Prescott's interpretation of the fluctuations of the Solow residual over the business cycle with more standard explanations of these fluctuations.

Question 44

Income per person exceeds $25,000 in many countries, but it is below $1,000 per person in many other countries. Based on the Solow growth model, suggest at least four possible explanations for this gap in living standards.

Question 45

Explain why additional capital generates both positive and negative impacts on steady-state consumption per worker in the Solow growth model with population growth and technological change.

Question 46

Suggest three explanations for the productivity slowdown experienced since 1972.

Question 47

The Solow model with population growth and labor-augmenting technological progress predicts balanced growth in the steady state. Growth rates of which variables are predicted to be balanced (i.e., will be equal) in the steady state?