Question 1

Service sector outputs could be expected to increase in price less than industrial sector outputs as an economy grows.

Accepted Answer

As an economy grows, the service sector often experiences higher price increases compared to the industrial sector due to the Baumol's cost disease, which states that industries with lower productivity growth, like many services, tend to have faster wage and price increases.

Question 2

The convergence hypothesis suggests that poor countries may close the income gap with rich countries.

Accepted Answer

The convergence hypothesis suggests that poor countries may experience faster economic growth rates than rich countries, enabling them to catch up and close the income gap over time.

Question 3

Productivity levels are higher in rich countries compared to poor countries.

Accepted Answer

This is because rich countries usually have better infrastructure, education, technology and more efficient systems in place. This enables workers to be more productive and efficient in their work. Additionally, workers in richer countries usually have higher wages and better working conditions, which can also improve productivity levels.

Question 4

Imitation, rather than innovation, is a way for poorer countries to achieve growth.

Accepted Answer

Imitation allows poorer countries to learn and adapt successful strategies and technologies already implemented by wealthier nations, leading to economic growth through increased productivity and efficiency. Innovation can be costly and risky for those countries, as they may lack the necessary resources and infrastructure to support it.

Question 5

College tuition costs have risen faster than prices in general from 1979 to 2009.

Accepted Answer

According to data from the College Board, during this period, college tuition and fees increased by 538%, while consumer prices increased by 286%.

Question 6

A nation's capital consists mainly of stocks, bonds, and other financial assets.

Accepted Answer

A nation's capital refers to the total value of physical and human assets within a country, including land, buildings, infrastructure, natural resources, and human capital. While financial assets may play a role in a nation's overall capital, they do not make up the majority of it.

Question 7

For a given technology, a higher capital stock will decrease labor productivity.

Accepted Answer

A higher capital stock actually increases labor productivity through the complementary relationship between capital and labor. Having more capital allows workers to work more efficiently and effectively, resulting in higher productivity.

Question 8

The ability to read, write, and run calculations are examples of human capital.

Accepted Answer

Human capital refers to the knowledge, skills, abilities, and other qualities that individuals possess and can use to create economic value. Reading, writing, and mathematical skills are examples of human capital as they are skills that can be applied in numerous jobs and industries.

Question 9

The poorest countries in Africa have some of the highest growth rates, thus proving the convergence hypothesis.

Accepted Answer

The convergence hypothesis suggests that poorer countries tend to have higher growth rates than richer countries, leading to a narrowing of the income gap over time. However, the statement in the question implies that the poorest countries have the highest growth rates, which is not consistent with the convergence hypothesis.

Question 10

As the amount of capital to laborers increases, labor productivity diminishes.

Accepted Answer

This statement is not true. In fact, increasing the capital to labor ratio can often lead to an increase in labor productivity through the use of new technologies and tools that can assist workers in performing their jobs more efficiently.

Question 11

When the economy devotes more of its resources to investment goods, it must devote fewer resources to consumer goods.

Accepted Answer

Investment goods are those goods that are used in the production of other goods and services, such as machinery and buildings. If the economy devotes more resources to producing investment goods, it means there are fewer resources available for producing consumer goods, which are goods that are directly consumed by individuals for their satisfaction. Therefore, the statement is true.

Question 12

As the level of real interest rates rise, the amount of new investment will rise also.

Accepted Answer

As the level of real interest rates rise, the cost of borrowing money to invest also rises, making it less attractive for investors to make new investments. Therefore, the amount of new investment will likely decrease, not rise.

Question 13

The production function shifts upward as the capital stock increases.

Accepted Answer

This statement is true according to the Solow-Swan model of economic growth, which shows that an increase in the capital stock leads to an increase in output (i.e. the production function shifts upward).

Question 14

Capital investment becomes more profitable for a business firm as the real interest rate decreases.

Accepted Answer

As the real interest rate decreases, the cost of borrowing money to make capital investments decreases, making those investments more profitable for a business firm.

Question 15

Expansion of factories, investment in new computers and/or equipment are processes of capital formation.

Accepted Answer

Capital formation refers to the process of increasing the stock of capital goods or assets in a country, which includes investment in new machines, equipment, and construction of factories.

Question 16

Human capital includes the tools and equipment that human beings work with.

Accepted Answer

Human capital refers to the knowledge, skills, and abilities of people that contribute to their ability to produce goods and services, not the tools and equipment they use.

Question 17

A superior level of technology is an important reason the productivity of workers in rich countries is high.

Accepted Answer

Rich countries generally invest more in advanced technology and infrastructure, which can help workers to be more productive. High-tech tools such as computers, automation, robotics, and other technologies can make production processes more efficient and accurate, leading to higher levels of productivity. Additionally, advanced communication and transportation systems can also facilitate faster and more efficient exchange of ideas and goods, further contributing to productivity.

Question 18

According to the convergence hypothesis, as a country grows wealthier, its productivity growth rate will slow down.

Accepted Answer

According to the convergence hypothesis, countries that are initially less productive will experience faster productivity growth rates than richer countries. Eventually, however, these less productive countries will catch up to the productivity level of richer countries, leading to a slower overall productivity growth rate for the economy as a whole.

Question 19

Improvements in the level of technology will generally shift the production function downward.

Accepted Answer

Improvements in the level of technology typically shift the production function upward, indicating an increase in output for any given level of input, reflecting higher efficiency and productivity.

Question 20

Some politicians argue that reducing the corporate income tax will increase business investment spending.

Accepted Answer

Lowering the corporate income tax rate can increase businesses' after-tax profits, which companies can either reinvest in the business or return to shareholders as dividends. This can encourage more capital investment and economic growth.

Quiz 23: Economic Growth: Theory and Policy