Deck 7: Consumers, Producers, and the Efficiency of Markets

Question 1

The steady-state level of capital occurs when the change in the capital stock (∆k) equals:

A)0.
B)the saving rate.
C)the depreciation rate.
D)the population growth rate.

Answer 1

A

Question 2

The consumption function in the Solow model assumes that society saves a:

A)constant proportion of income.
B)smaller proportion of income as it becomes richer.
C)larger proportion of income as it becomes richer.
D)larger proportion of income when the interest rate is higher.

Answer 2

A

Question 3

In this graph, when the capital-labor ratio is OA, AB represents:

A)investment per worker, and AC represents consumption per worker.
B)consumption per worker, and AC represents investment per worker.
C)investment per worker, and BC represents consumption per worker.
D)consumption per worker, and BC represents investment per worker.

Answer 3

C

Question 4

In the Solow growth model of Chapter 7, the saving rate determines the allocation of output between:

A)saving and investment. output and capital.
B)consumption and output.
C)investment and
D)consumption.

Question 5

In the Solow growth model, the assumption of constant returns to scale means that:

A)all economies have the same amount of capital per worker.
B)the steady-state level of output is constant regardless of the number of workers.
C)the saving rate equals the constant rate of depreciation.
D)the number of workers in an economy does not affect the relationship between output per worker and capital per worker.

Question 6

In the Solow growth model of Chapter 7, the economy ends up with a steady-state level of capital:

A)only if it starts from a level of capital below the steady-state level.
B)only if it starts from a level of capital above the steady-state level.
C)only if it starts from a steady-state level of capital.
D)regardless of the starting level of capital.

Question 7

In the Solow growth model of Chapter 7, the demand for goods equals investment:

A)minus depreciation.
B)plus saving.
C)plus consumption.
D)plus depreciation.

Question 8

Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker:

A)more in Highland.
B)more in Lowland.
C)by the same amount in Highland and Lowland.
D)in Highland, but not in Lowland.

Question 9

Unlike the long-run classical model in Chapter 3, the Solow growth model:

A)assumes that the factors of production and technology are the sources of the economy's output.
B)describes changes in the economy over time.
C)is static.
D)assumes that the supply of goods determines how much output is produced.

Question 10

In the Solow growth model of Chapter 7, for any given capital stock, the determines how much output the economy produces, and the determines the allocation of output between consumption and investment.

A)saving rate; production function
B)depreciation rate; population growth rate
C)production function; saving rate
D)population growth rate; saving rate

Question 11

Exhibit: The Capital-Labor Ratio

In this graph, starting from capital-labor ratio k , the capital-labor ratio will:

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

Question 12

The Solow growth model describes:

A)how output is determined at a point in time.
B)how output is determined with fixed amounts of capital and labor.
C)how saving, population growth, and technological change affect output over time.
D)the static allocation, production, and distribution of the economy's output.

Question 13

In the Solow growth model, the steady-state occurs when:

A)capital per worker is constant.
B)the saving rate equals the depreciation rate.
C)output per worker equals consumption per worker.
D)consumption per worker is maximized.

Question 14

cause(s) the capital stock to rise, while cause(s) the capital stock to fall.

A)Inflation; deflation
B)Interest rates; the discount rate
C)Investment; depreciation
D)International trade; depressions

Question 15

If capital lasts an average of 25 years, the depreciation rate is percent per year.

A)25
B)5
C)4
D)2.5

Question 16

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the:

A)graph is a straight line.
B)slope of the line eventually gets flatter and flatter.
C)slope of the line eventually becomes negative.
D)slope of the line eventually becomes steeper and steeper.

Question 17

In the Solow model, it is assumed that a(n) fraction of capital wears out as the capital-labor ratio increases.

A)smaller
B)larger
C)constant
D)increasing

Question 18

In the Solow growth model of Chapter 7, investment equals:

A)output.
B)consumption.
C)the marginal product of capital.
D)saving.

Question 19

The production function y = f(k) means:

A)labor is not a factor of production.
B)output per worker is a function of labor productivity.
C)output per worker is a function of capital per worker.
D)the production function exhibits increasing returns to scale.

Question 20

In the steady state, the capital stock does not change because investment equals:

A)output per worker.
B)the marginal product of capital.
C)depreciation.
D)consumption.

Question 21

An economy in the steady state will have:

A)investment exceeding depreciation.
B)no depreciation.
C)saving equal to consumption.
D)no change in the capital stock.

Question 22

The economies of two countries, Thrifty and Profligate, have the same production functions and depreciation rates. There is no population growth or technological progress in either country. The economies of each country can be described by the Solow growth model. The saving rate in Thrifty is
0.5. The saving rate in Profligate is 0.3.
a. In which country is the level of steady-state output per worker larger? Explain. b. In which country is the steady-state growth rate of output per worker larger?
c. In which country is the growth rate of steady-state total output greater?

Question 23

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is:

A)1.
B)2.
C)4.
D)9.

Question 24

The economy of Alpha can be described by the Solow growth model. The following are some characteristics of the Alpha economy:
saving rate (s) 0.20 depreciation rate () 0.12 steady-state capital per worker (k) 4 population growth rate (n) 0.02 steady-state output per worker 20,000
a. What is the steady-state growth rate of output per worker in Alpha?
b. What is the steady-state growth rate of total output in Alpha?
c. What is the level of steady-state consumption per worker in Alpha?
d. What is the steady-state level of investment per worker in Alpha?

Question 25

The initial steady-state level of capital per worker in Macroland is 5. The Golden Rule level of capital per worker in Macroland is 8.
a. What must change in Macroland to achieve the Golden Rule steady state?
b. Why might the Golden Rule steady state be preferred to the initial steady state?
c. Why might some current workers in Macroland prefer the initial steady state to the Golden Rule steady state?

Question 26

Consider two countries that are otherwise identical (have the same saving rates and depreciation rates), but the population of Country Large is 100 million, while the population of Country Small is 10 million. Use the Solow model with no technological change to compare the steady-state levels of output per worker if:
a. the population growth rates are the same in the two countries. b. the population growth rate is higher in Country Large.

Question 27

Many policymakers are concerned that Americans do not save enough. Using the Solow growth model of an economy with no technological change and no population growth, explain why:
a. for a given production function and depreciation rate, the saving rate determines the level of output per worker.
b. a higher saving rate will not necessarily generate more consumption per worker. c. a higher saving rate will not produce a faster steady-state growth rate of output
per worker.

Question 28

The formula for the steady-state ratio of capital to labor (k*), with no population growth or technological change, is s:

A)divided by the depreciation rate.
B)multiplied by the depreciation rate.
C)divided by the product of f(k*) and the depreciation rate.
D)multiplied by f(k*) divided by the depreciation rate.

Question 29

Assume that a country's production function is Y = K1/2L1/2. a. What is the per-worker production function y = f(k)?
b. Assume that the country possesses 40,000 units of capital and 10,000 units of labor. What is Y? What is labor productivity computed from the per-worker production function? Is this value the same as labor productivity computed from the original production function?
c. Assume that 10 percent of capital depreciates each year. What gross saving rate is necessary to make the given capital-labor ratio the steady-state capital-labor ratio? (Hint: In a steady state with no population growth or technological change, the saving rate multiplied by per-worker output must equal the depreciation rate multiplied by the capital-labor ratio.)
d. If the saving rate equals the steady-state level, what is consumption per worker?

Question 30

In the Solow growth model, if investment exceeds depreciation, the capital stock will and output will until the steady state is attained.

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

Question 31

Suppose that two countries are exactly alike in every respect except that the citizens of country A have a higher saving rate than the citizens of country B.
a. Which country will have the higher level of output per worker in the steady state? Illustrate graphically.
b. Which country will have the faster rate of growth of output per worker in the steady state?

Question 32

In the Solow growth model, if investment is less than depreciation, the capital stock will and output will until the steady state is attained.

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

Question 33

The economies of two countries, North and South, have the same production functions, depreciation rates, and saving rates. The economy of each country can be described by the Solow growth model. Population growth is faster in South than in North.
a. In which country is the level of steady-state output per worker larger? Explain. b. In which country is the steady-state growth rate of output per worker larger?
c. In which country is the growth rate of steady-state total output greater?

Question 34

Suppose that two countries are exactly alike in every respect except that population grows at a faster rate in country A than in country B.
a. Which country will have the higher level of output per worker in the steady state? Illustrate graphically.
b. Which country will have the faster rate of growth of output per worker in the steady state?

Question 35

In the Solow growth model of an economy with no population growth and no technological progress, the higher the steady capital-per-worker ratio, the higher the steady-state:

A)growth rate of total output.
B)level of total output.
C)growth rate of output per worker.
D)level of output per worker.