Question 1

Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of physical capital.In the long run,you would expect that:
A) the production function will have shifted upward.
B) the production function will have shifted downward.
C) the production function will have shifted back to its original position after having shifted downward in the short run.
D) there has been a permanent downward movement along the production function.
E) there has been no effect on the production function and real gross domestic product (GDP) returns to the steady state level.

Accepted Answer

The answer of Suppose a major hurricane hits the eastern...

Question 2

When _________ units of capital are purchased,the marginal product will _________.
A) more; increase
B) more; not change
C) more; decrease
D) fewer; decrease
E) fewer; not change

Accepted Answer

The law of diminishing marginal returns states that as more units of a variable input (such as capital) are added to a fixed input (such as land or labor), the marginal product (the additional output produced by each additional unit of the variable input) will eventually decrease. Therefore, when more units of capital are purchased, the marginal product will decrease.

Question 3

A firm has 100 computers,and each year 5 of them become obsolete and must be recycled.This firm is in a steady state if investment each year is equal to:
A) 0.
B) 5.
C) 1.
D) 100.
E) 95.

Accepted Answer

The answer of A firm has 100 computers,and each year...

Question 4

A lawn service company has 20 lawn mowers.This year they buy 3 new ones and get rid of 2 old ones.In this case,investment is equal to _________ and net investment is equal to _________.
A) 3; 3
B) 3; 1
C) 3; 2
D) 5; 3
E) 3; 5

Accepted Answer

The answer of A lawn service company has 20 lawn...

Question 5

When a firm buys a new computer _________ increases,and when the firm gets rid of old computers _________ decreases.
A) investment; investment
B) net investment; net investment
C) capital; capital
D) investment; depreciation
E) depreciation; investment

Accepted Answer

The answer of When a firm buys a new computer...

Question 6

Suppose that in the economy the level of capital is 500 units,the depreciation rate is 4%,and the level of investment is 20 units.In this case:
A) net investment is negative.
B) net investment is positive.
C) the level of output will decrease.
D) the level of capital will increase.
E) the economy is in a steady state.

Accepted Answer

The answer of Suppose that in the economy the level...

Question 7

If an economy is in the steady state,then:
A) net investment is zero.
B) depreciation is zero.
C) investment is zero.
D) the marginal product of capital is zero.
E) there are no diminishing returns.

Accepted Answer

In the steady state, the economy is at a constant level of output and consumption, which means that investment and depreciation are balanced, resulting in zero net investment.

Question 8

According to the Solow growth model,advanced economies with large stocks of capital will:
A) eventually stop growing.
B) continue to grow at a constant rate.
C) always have levels of real gross domestic product (GDP) that are higher than the less advanced economies.
D) all converge to the same level of real GDP.
E) never reach a steady state.

Accepted Answer

According to the Solow growth model, advanced economies with large stocks of capital will eventually stop growing because they will reach a steady state where the rate of capital accumulation is equal to the rate of depreciation.

Question 9

A firm has a total of 25 workstations in four different office buildings.This year they build 3 new workstations and get rid of 5 old ones.In this case,investment is equal to _________ and net investment is equal to _________.
A) 3; 5
B) 3; −2
C) 3; 2
D) 5; 3
E) 2; −2

Accepted Answer

Investment refers to the total number of new workstations built, which is 3. Net investment is the total new workstations minus the old ones removed, which is 3 - 5 = -2.

Question 10

An economy is in a steady state if:
A) depreciation is zero.
B) investment is zero.
C) net investment is positive.
D) capital and output are not changing.
E) there are diminishing returns.

Accepted Answer

In a steady state economy, the levels of capital and output are stable, meaning that they are not changing. This is because the amount of investment equals the amount of depreciation, resulting in a constant level of capital. Therefore, choice D is the correct answer.

Question 11

As a country approaches the steady state,the returns to capital _________.
A) increase.
B) decrease.
C) turn negative.
D) become equal to zero.
E) are unaffected.

Accepted Answer

As a country approaches the steady state, capital stock increases which leads to a decrease in marginal productivity and thus, the returns to capital decrease.

Question 12

An economy is in the steady state if:
A) investment equals depreciation.
B) investment equals zero.
C) net investment equals depreciation.
D) capital grows at a constant rate.
E) there are no diminishing returns.

Accepted Answer

In the steady state, the amount of capital remains constant, which means that the level of investment is just enough to replace the capital that has depreciated. Therefore, option A is correct as it states that investment equals depreciation in the steady state. Option B is incorrect as there must be investment to replace the depreciated capital. Option C is not the definition of the steady state, but rather the condition for the capital stock to remain constant. Option D may be true, but it is not a necessary condition for the steady state. Option E is unrelated to the definition of the steady state.

Question 13

A firm has 50 computers.Every year,they buy 3 new ones and get rid of 3 old ones.In this case,investment is equal to _________ and net investment is equal to _________.
A) 3; 3
B) 3; 0
C) 3; −3
D) 6; 3
E) 3; 6

Accepted Answer

Investment is the total number of new computers bought, which is 3. Net investment is the change in the total number of computers, which is 0 since they buy 3 and get rid of 3.

Question 14

As a nation approaches its steady state,the returns to capital _________ and the growth of real gross domestic product (GDP) _________.
A) increase; increases
B) decrease; slows down
C) increase; slows down
D) decrease; increases
E) remain unchanged; remains unchanged

Accepted Answer

As a nation approaches its steady state, the returns to capital decrease due to diminishing marginal returns on investment. This causes the growth of real GDP to slow down, as there is less investment leading to lower productivity and output.

Question 15

Suppose that the level of capital in the economy is 100 units,the depreciation rate is 5%,and investment is equal to 10 units.In this case:
A) the level of capital will increase.
B) the economy is in a steady state.
C) the level of capital will decrease.
D) the level of output will decrease.
E) investment is less than net investment.

Accepted Answer

In the given scenario, the economy is not in a steady state because investment (10 units) is greater than the depreciation amount (5 units). Therefore, the level of capital will increase as new investment is adding to the existing capital stock. This will likely result in an increase in output as well.

Question 16

The economy tends to approach a steady state because:
A) there is a shortage of skilled workers.
B) people run out of new ideas.
C) there are diminishing returns.
D) government policies inhibit further growth.
E) there is depreciation.

Accepted Answer

The concept of diminishing returns states that as more resources are added to production, eventually the output gained from each additional unit of input will decrease. As a result, the economy will reach a point where further increases in production will not be efficient or effective, leading to a steady state.

Question 17

Depreciation is:
A) the wearing out of capital over time.
B) the reduction of investment over time.
C) the decline of output over time.
D) the tendency of economies to converge to the same output level.
E) what happens when technology does not advance.

Accepted Answer

Depreciation refers to the reduction in value of a capital asset over time due to wear and tear or obsolescence. This reduction in value is often accounted for in the financial statements of a company by reducing the asset's book value at a fixed rate over its useful life. Depreciation is an important concept in accounting and finance as it affects a company's profitability, tax liability, and ability to generate cash flows.

Question 18

When the value of a resource declines over time,this is known as:
A) depreciation.
B) the steady state.
C) diminishing returns.
D) diminishing marginal product.
E) net loss.

Accepted Answer

Depreciation refers to the decline in value of a resource over time due to wear and tear, obsolescence, or other factors.

Question 19

A company has three delivery trucks.Each month the trucks require repairs to keep them in good working order.Which of the following is true?
A) Investment is equal to zero.
B) Net investment is equal to zero.
C) The company is not in a steady state.
D) Capital is increasing.
E) Capital is decreasing.

Accepted Answer

Since the repairs needed to keep the trucks in good working order are ongoing expenses, they are considered maintenance rather than net investment. Therefore, the net investment (which takes into account both investment and depreciation) is equal to zero. The other options are not applicable as they suggest a change in capital, which is not necessarily the case here.

Question 20

Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of physical capital.All else the same,in the short run,real gross domestic product (GDP) will _________,and in the long run,real GDP will _________.
A) decline; be permanently lower
B) decline; return to the steady state level
C) be unchanged; decline
D) increase; decrease
E) decline; end up higher than the original level

Accepted Answer

In the short run, real GDP will decline due to the destruction of physical capital. However, in the long run, the economy will return to its steady state level, with new capital stock replacing the lost capital. Therefore, real GDP will return to its initial level.

Quiz 12: Growth Theory

Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of physical capital.In the long run,you would expect that:

When _ units of capital are purchased,the marginal product will _.

A firm has 100 computers,and each year 5 of them become obsolete and must be recycled.This firm is in a steady state if investment each year is equal to:

A lawn service company has 20 lawn mowers.This year they buy 3 new ones and get rid of 2 old ones.In this case,investment is equal to _ and net investment is equal to _.

When a firm buys a new computer _ increases,and when the firm gets rid of old computers _ decreases.

Suppose that in the economy the level of capital is 500 units,the depreciation rate is 4%,and the level of investment is 20 units.In this case:

If an economy is in the steady state,then:

According to the Solow growth model,advanced economies with large stocks of capital will:

A firm has a total of 25 workstations in four different office buildings.This year they build 3 new workstations and get rid of 5 old ones.In this case,investment is equal to _ and net investment is equal to _.

An economy is in a steady state if:

As a country approaches the steady state,the returns to capital _________.

An economy is in the steady state if:

A firm has 50 computers.Every year,they buy 3 new ones and get rid of 3 old ones.In this case,investment is equal to _ and net investment is equal to _.

As a nation approaches its steady state,the returns to capital _ and the growth of real gross domestic product (GDP) _.

Suppose that the level of capital in the economy is 100 units,the depreciation rate is 5%,and investment is equal to 10 units.In this case:

The economy tends to approach a steady state because:

Depreciation is:

When the value of a resource declines over time,this is known as:

A company has three delivery trucks.Each month the trucks require repairs to keep them in good working order.Which of the following is true?

Suppose a major hurricane hits the eastern coast of Florida and only destroys significant amounts of physical capital.All else the same,in the short run,real gross domestic product (GDP) will _,and in the long run,real GDP will _.