Deck 7: Economic Growth I

Question 1

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.

Answer 1

more in Lowland.

Question 2

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.

Answer 2

describes changes in the economy over time.

Question 3

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

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

Answer 3

saving.

Question 4

(Exhibit: Output,Consumption,and Investment)In this graph,when the capital-labour 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.

Question 5

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

A) output per worker.
B) output per unit of capital.
C) the marginal product of labour.
D) the marginal product of capital.

Question 6

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 7

If the capital stock equals 200 units in year one and the depreciation rate is 5 percent per year,then in year two,assuming no new or replacement investment,the capital stock would equal _____ units.

A) 210
B) 200
C) 195
D) 190

Question 8

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 9

______ 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 10

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 labour.
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 11

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

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

Question 12

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 13

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 14

The change in capital stock per worker ( $\Delta$ k)may be expressed as a function of s-the saving ratio,f(k)-output per worker,k-capital per worker,and $\delta$ -the depreciation rate,by the equation:

A) $\Delta$ k = sf(k)/ $\delta$ k.
B) $\Delta$ k = sf(k)× $\delta$ k.
C) $\Delta$ k = sf(k)+ $\delta$ k.
D) $\Delta$ k = sf(k)- $\delta$ k.

Question 15

In the Solow growth model of Chapter 7,where s is the saving rate,y is output per worker,and i is investment per worker,consumption per worker (c)equals:

A) sy.
B) (1 - s)y.
C) (1 + s)y.
D) (1 - s)y - i.

Question 16

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.

Question 17

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 18

Investment per worker (i)as a function of the saving ratio (s)and output per worker (f(k))may be expressed as:

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

Question 19

The production function y = f(k)means:

A) labour is not a factor of production.
B) output per worker is a function of labour 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 Solow model,it is assumed that a(n)______ fraction of capital wears out as the capital-labour ratio increases.

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

Question 21

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) growth rate of capital per worker
C) growth rate of output per worker.
D) level of output per worker.

Question 22

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 23

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 24

A higher saving rate leads to a:

A) higher rate of economic growth in both the short run and the long run.
B) higher rate of economic growth only in the long run.
C) higher rate of economic growth in the short run but a decline in the long run.
D) large capital stock and a high level of output in the long run.

Question 25

The Solow model shows that a key determinant of the steady-state ratio of capital to labour is the:

A) level of output.
B) labour force.
C) saving rate.
D) capital elasticity in the production function.

Question 26

Examination of recent data for many countries shows that countries with high saving rates generally have high levels of output per person because:

A) high saving rates mean permanently higher growth rates of output.
B) high saving rates lead to high levels of capital per worker.
C) countries with high levels of output per worker can afford to save a lot.
D) countries with large amounts of natural resources have both high output levels and high saving rates.

Question 27

The formula for the steady-state ratio of capital to labour (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 28

If the national saving rate increases,the:

A) economy will grow at a faster rate forever.
B) capital-labour ratio will increase forever.
C) economy will grow at a faster rate until a new,higher,steady-state capital-labour ratio is reached.
D) capital-labour ratio will eventually decline.

Question 29

In the Solow growth model,with a given production function,depreciation rate,no technological change,and no population growth,a higher saving rate produces a:

A) higher marginal product of capital in the new steady-state.
B) higher steady-state growth rate of output per worker.
C) higher steady-state growth rate of total output.
D) higher steady-state level of output per worker.

Question 30

Starting from a steady-state situation,if the saving rate increases,the rate of growth of capital per worker will:

A) increase and continue to increase unabated.
B) increase until the new steady state is reached.
C) decrease until the new steady state is reached.
D) decrease and continue to decrease unabated.

Question 31

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged,the Solow model predicts output will grow and that the new steady state will approach:

A) a higher output level than before.
B) the same output level as before.
C) a lower output level than before.
D) the Golden Rule output level.

Question 32

(Exhibit: Capital-Labour Ratio and the Steady State)In this graph,capital-labour ratio k₂ is not the steady-state capital-labour ratio because:

A) the saving rate is too high.
B) the investment ratio is too high.
C) gross investment is greater than depreciation.
D) depreciation is greater than gross investment.

Question 33

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 34

(Exhibit: Steady-State Capital-Labour Ratio)In this graph,the capital-labour ratio that represents the steady-state capital-labour ratio is:

A) k₀.
B) k₁.
C) k₂.
D) k₃.

Question 35

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 36

Assume two economies are identical in every way except that one has a higher saving rate.According to the Solow growth model,in the steady state the country with the higher saving rate will have ______ level of total output and ______ rate of growth of output per worker as/than the country with the lower saving rate.

A) the same; the same
B) the same; a higher
C) a higher; the same
D) a higher; a higher

Question 37

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 38

Among the four countries-the United States,the United Kingdom,Germany,and Japan-the one that experienced the most rapid growth rate of output per person between 1948 and 1972 was:

A) the United States.
B) the United Kingdom.
C) Germany.
D) Japan.

Question 39

(Exhibit: The Capital-Labour Ratio)In this graph,starting from capital-labour ratio k₁,the capital-labour ratio will:

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

Question 40

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

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

Question 41

The Golden Rule level of capital accumulation is the steady state with the highest level of:

A) output per worker.
B) capital per worker.
C) savings per worker.
D) consumption per worker.

Question 42

If an economy is in a steady state with a saving rate below the Golden Rule level,efforts to increase the saving rate result in:

A) both higher per-capita output and higher per-capita depreciation,but the increase in per capita output would be greater.
B) both higher per-capita output and higher per-capita depreciation,but the increase in per capita depreciation would be greater.
C) higher per capita output and lower per-capita depreciation.
D) lower per capita output and higher per-capita depreciation.

Question 43

The formula for steady-state consumption per worker (c*)as a function of output per worker and investment per worker is:

A) c* = f(k*)- $\delta$ k*.
B) c* = f(k*)+ $\delta$ k*.
C) c* = f(k*)÷ dk*.
D) c* = k* - $\delta$ f(k)*.

Question 44

The Golden Rule level of the steady-state capital stock:

A) will be reached automatically if the saving rate remains constant over a long period.
B) will be reached automatically if each person saves enough to provide for his or her retirement.
C) implies a choice of a particular saving rate.
D) should be avoided by an enlightened government.

Question 45

(Exhibit: Steady-State Consumption II)The Golden Rule level of steady-state investment per worker is:

A) AC.
B) AB.
C) BC.
D) DE.

Question 46

A reduction in the saving rate starting from a steady state with more capital than the Golden Rule causes investment to ______ in the transition to the new steady state.

A) increase
B) decrease
C) first increase,then decrease
D) first decrease,then increase

Question 47

If an economy is in a steady state with no population growth or technological change,and the capital stock is below the Golden Rule:

A) a policymaker should definitely take all possible steps to increase the saving rate.
B) if the saving rate is increased,output and consumption per capita will both rise,both in the short and long runs.
C) if the saving rate is increased,output per capita will at first decline and then rise above its initial level,and consumption per capita will rise both in the short and long runs.
D) if the saving rate is increased,output per capita will rise and consumption per capita will first decline and then rise above its initial level.

Question 48

(Exhibit: Steady-State Consumption II)The Golden Rule level of steady-state consumption per worker is:

A) AC.
B) AB.
C) BC.
D) DE.

Question 49

Suppose an economy is initially in a steady state with capital per worker exceeding the Golden Rule level.If the saving rate falls to a rate consistent with the Golden Rule,then in the transition to the new steady state consumption per worker will:

A) always exceed the initial level.
B) first fall below then rise above the initial level.
C) first rise above then fall below the initial level.
D) always be lower than the initial level.

Question 50

To determine whether an economy is operating at its Golden Rule level of capital stock,a policymaker must determine the steady-state saving rate that produces the:

A) largest MPK.
B) smallest depreciation rate.
C) largest consumption per worker.
D) largest output per worker.

Question 51

In an economy with no population growth and no technological change,steady-state consumption is at its greatest possible level when the marginal product of:

A) labour equals the marginal product of capital.
B) labour equals the depreciation rate.
C) capital equals the depreciation rate.
D) capital equals zero.

Question 52

(Exhibit: Steady-State Consumption I)The Golden Rule level of the capital-labour ratio is:

A) k*_A .
B) above k*_A but below k*_B .
C) k*_B .
D) above k*_B .

Question 53

When an economy begins above the Golden Rule,reaching the Golden Rule:

A) produces lower consumption at all times in the future.
B) produces higher consumption at all times in the future.
C) requires initially reducing consumption to increase consumption in the future.
D) requires initially increasing consumption to decrease consumption in the future.

Question 54

Suppose an economy is initially in a steady state with capital per worker below the Golden Rule level.If the saving rate increases to a rate consistent with the Golden Rule,then in the transition to the new steady state consumption per worker will:

A) always exceed the initial level.
B) first fall below,then rise above the initial level.
C) first rise above,then fall below the initial level.
D) always be lower than the initial level.

Question 55

If an economy with no population growth or technological change has a steady-state MPK of 0.1,a depreciation rate of 0.1,and a saving rate of 0.2,then the steady-state capital stock:

A) is greater than the Golden Rule level.
B) is less than the Golden Rule level.
C) equals the Golden Rule level.
D) could be either above or below the Golden Rule level.

Question 56

In the Solow growth model,increases in capital ______ output and ______ the amount of output used to replace depreciating capital.

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

Question 57

If an economy is in a steady state with no population growth or technological change,and the marginal product of capital is less than the depreciation rate:

A) the economy is following the Golden Rule.
B) steady-state consumption per worker would be higher in a steady state with a lower saving rate.
C) steady-state consumption per worker would be higher in a steady state with a higher saving rate.
D) the depreciation rate should be decreased to achieve the Golden Rule level of consumption per worker.

Question 58

With a per-worker production function y = k^1/2,the steady-state capital stock per worker (k^*)as a function of the saving rate (s)is given by:

A) k* = (s/ $\delta$ )².
B) k* = ( $\delta$ /s)².
C) k* = s/ $\delta$ .
D) k* = $\delta$ /s.

Question 59

If an economy with no population growth or technological change has a steady-state MPK of 0.125,a depreciation rate of 0.1,and a saving rate of 0.225,then the steady-state capital stock:

A) is greater than the Golden Rule level.
B) is less than the Golden Rule level.
C) equals the Golden Rule level.
D) could be either above or below the Golden Rule level.

Question 60

If an economy is in a steady state with no population growth or technological change,and the capital stock is above the Golden Rule level and the saving rate falls:

A) output,consumption,investment,and depreciation will all decrease.
B) output and investment will decrease,and consumption and depreciation will increase.
C) output and investment will decrease,and consumption and depreciation will increase and then decrease but finally approach levels above their initial state.
D) output,investment,and depreciation will decrease,and consumption will increase and then decrease but finally approach a level above its initial state.

Question 61

In the Solow growth model of an economy with population growth but no technological change,a higher level of steady-state output per worker can be obtained by all of the following except:

A) increasing the saving rate.
B) decreasing the depreciation rate.
C) increasing the population growth rate.
D) increasing the capital per worker ratio.

Question 62

With population growth at rate n but no technological change,the Golden Rule steady state may be achieved by equating the marginal product of capital (MPK):

A) net of depreciation to n.
B) to n.
C) net of depreciation to the depreciation rate plus n.
D) to the depreciation rate.

Question 63

In the Solow growth model of an economy with population growth but no technological progress,if in the steady state the marginal product of capital equals 0.10,the depreciation rate equals 0.05,and the rate of population growth equals 0.03,then the capital per worker ratio ______ the Golden Rule level.

A) is above
B) is below
C) is equal to
D) moves to

Question 64

In an economy with population growth at rate n,the change in capital stock per worker is given by the equation:

A) $\Delta$ k = sf(k)+ $\delta$ k.
B) $\Delta$ k = sf(k)- $\delta$ k.
C) $\Delta$ k = sf(k)+ ( $\delta$ + n)k.
D) $\Delta$ k = sf(k)- ( $\delta$ + n)k.

Question 65

In the Solow growth model,with a given production function,depreciation rate,saving rate,and no technological change,higher rates of population growth produce:

A) higher steady-state ratios of capital per worker.
B) higher steady-state growth rates of output per worker.
C) higher steady-state growth rates of total output.
D) higher steady-state levels of output per worker.

Question 66

In the Solow growth model of an economy with population growth but no technological change,if population grows at rate n,total output grows at rate ______ and output per workers grows at rate ______.

A) n; n
B) n; 0
C) 0; 0
D) 0; n

Question 67

The Solow growth model with population growth but no technological progress can explain:

A) persistent growth in output per worker.
B) persistent growth in total output.
C) persistent growth in consumption per worker.
D) persistent growth in the saving rate.

Question 68

In the Solow growth model of an economy with population growth but no technological progress,increases in capital have a positive impact on steady-state consumption per worker by ______,but have a negative impact on steady-state consumption per worker by ______.

A) increasing the capital to worker ratio; reducing saving in the steady state
B) reducing investment required in the steady state; increasing saving in the steady state
C) increasing output; increasing output required to replace depreciating capital
D) decreasing the saving rate; increasing the depreciation rate

Question 69

In the Solow growth model,the steady-state level of output per worker would be higher if the ______ increased or the ______ decreased.

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

Question 70

The Solow model with population growth but no technological change cannot explain persistent growth in standards of living because:

A) total output does not grow.
B) depreciation grows faster than output.
C) output,capital,and population all grow at the same rate in the steady state.
D) capital and population grow,but output does not keep up.

Question 71

The formula for the steady-state ratio of capital to labour (k*)with population growth at rate n but no technological change,where s is the saving rate,is s:

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

Question 72

In the Solow growth model of an economy with population growth but no technological change,if population grows at rate n,then capital grows at rate ______ and output grows at rate ______.

A) n; n
B) n; 0
C) 0; 0
D) 0; n

Question 73

When an economy begins below the Golden Rule,reaching the Golden Rule:

A) produces lower consumption at all times in the future.
B) produces higher consumption at all times in the future.
C) requires initially reducing consumption to increase consumption in the future.
D) requires initially increasing consumption to decrease consumption in the future.

Question 74

In the Solow growth model of an economy with population growth but no technological change,which of the following will generate a higher steady-state growth rate of total output?

A) a higher saving rate
B) a lower depreciation rate
C) a higher population growth rate
D) a higher capital per worker ratio

Question 75

In the Solow growth model of an economy with population growth but no technological progress,the steady-state amount of investment can be thought of as a break-even amount of investment because the quantity of investment just equals the amount of:

A) output needed to achieve the maximum level of consumption per worker.
B) capital needed to replace depreciated capital and to equip new workers.
C) saving needed to achieve the maximum level of output per worker.
D) output needed to make the capital per worker ratio equal to the marginal product of capital.

Question 76

In the Solow growth model of an economy with population growth but no technological change,the break-even level of investment must do all of the following except:

A) offset the depreciation of existing capital.
B) provide capital for new workers.
C) equal the marginal productivity of capital (MPK).
D) keep the level of capital per worker constant.

Question 77

An increase in the saving rate starting from a steady state with less capital than the Golden Rule causes investment to ______ in the transition to the new steady state.

A) increase
B) decrease
C) first increase,then decrease
D) first decrease,then increase

Question 78

In the Solow growth model,with a given production function,depreciation rate,saving rate,and no technological change,lower rates of population growth produce:

A) lower steady-state ratios of capital per worker.
B) lower steady-state growth rates of output per worker.
C) lower steady-state growth rates of total output.
D) lower steady-state levels of output per worker.

Question 79

In the Solow growth model,if two countries are otherwise identical (with the same production function,same saving rate,same depreciation rate,and same rate of population growth)except that Country Large has a population of one billion workers and Country Small has a population of 10 million workers,then the steady-state level of output per worker will be ______ and the steady-state growth rate of output per worker will be ______.

A) the same in both countries; the same in both countries
B) higher in Country Large; higher in Country Large
C) higher in Country Small; higher in Country Small
D) higher in Country Large; higher in Country Small

Question 80

Assume two economies are identical in every way except that one has a higher population growth rate.According to the Solow growth model,in the steady state,the country with the higher population growth rate will have a ______ level of total output and ______ rate of growth of output per worker as/than the country with the lower population growth rate.

A) higher; the same
B) higher; a higher
C) lower; the same
D) lower; a lower