Question 1

If a country's saving rate declined, then other things the same, in the long run the country would have

Accepted Answer

A country's saving rate is directly related to its investment rate and, in turn, its productivity growth. Lower savings rates lead to lower investment rates, which result in lower productivity growth in the long run. Lower productivity growth, in turn, leads to lower real GDP per person as resources become less productive over time. Thus, in the long run, a decline in a country's saving rate would result in both lower productivity and lower real GDP per person.

Question 2

An increase in the saving rate would, other things the same,

Accepted Answer

An increase in the saving rate would lead to an increase in investment, which, in turn, would lead to an increase in economic growth. However, the impact of this increase would vary depending on the initial level of development of the country. In a poor country, where the initial saving rate is low, a small increase in the saving rate would lead to a relatively larger increase in investment and growth. However, once the saving rate stabilizes at a higher level, the effect on growth would be temporary. In contrast, in a rich country, where the initial saving rate is already high, an increase in the saving rate would have a smaller impact on growth but would be more sustainable in the long run. Therefore, choice B is the best answer.

Question 3

Real GDP per person is $30,000 in Country A, $20,000 in Country B, and $11,000 in Country C. Saving per person is $1,000 in all three countries. Other things equal, we would expect that

Accepted Answer

According to the catch-up effect, poorer countries (with lower GDP per person) tend to grow faster than richer ones because they can adopt existing technologies and practices from wealthier countries. Thus, Country C is expected to grow the fastest.

Question 4

Country A has real GDP per person of 10,000 while country B has real GDP per person of 20,000. All else constant, country A will eventually have a higher standard of living than country B if

Accepted Answer

Country A will eventually have a higher standard of living than country B if the level of saving per person is higher in country A than in country B. This is because saving leads to investment, which leads to economic growth.

Question 5

Suppose that Slovenia undertakes a policy to increase its saving rate. This policy will likely

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Question 6

Other things the same, if a country increased its saving rate, in 40 years or so it would likely have

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Question 7

According to studies using international data, an increase in the saving rate

Accepted Answer

According to international data, an increase in the saving rate results in an increase in the growth rate of output for several decades. This is likely due to the fact that increased saving leads to increased investment, which boosts productivity and eventually increases economic growth.

Question 8

Evidence shows that other things the same, poor countries grow

Accepted Answer

Poor countries often grow faster than rich countries due to the catch-up effect, and some countries that were poor in 1870 have become rich, such as South Korea and Singapore.

Question 9

Which of the following best describes the response of output as time passes to an increase in the saving rate?

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The answer of Which of the following best describes the...

Question 10

The catch-up effect refers to the idea that

Accepted Answer

The catch-up effect refers to the tendency for countries with lower initial levels of productivity or income to experience faster economic growth and eventually "catch-up" to countries with higher initial levels. This is due to factors such as having greater potential for productivity gains through technology adoption, investment in physical and human capital, and access to global markets. The other choices (A, C, D) are not accurate descriptions of the catch-up effect.

Question 11

Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital per worker and so it has more real GDP per worker than the other. Finally, suppose that the saving rate in both countries increases from 4 percent to 7 percent. Over the next ten years we would expect that

Accepted Answer

The country that started with less capital per worker will experience a higher growth rate than the country that started with more capital per worker. This is due to the fact that there are diminishing returns to capital, meaning that as a country already has more capital per worker, additional investment will lead to lower increases in output per worker. Therefore, the country with less capital per worker will experience a higher growth rate as the additional investment will lead to larger increases in output per worker.

Question 12

Assuming diminishing returns,

Accepted Answer

Diminishing returns imply that the increase in output growth from an increase in the saving rate falls over time. This means that as a country becomes richer and already has a higher saving rate, additional increases in saving rate will not lead to as much additional output growth as it would for a poor country with a lower saving rate. Therefore, poor countries should grow faster than rich ones as they have more room for growth through increases in saving rates.

Question 13

Suppose Turkey increases its saving rate. In the long run

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Question 14

Other things equal, relatively poor countries tend to grow

Accepted Answer

The catch-up effect refers to the trend of relatively poor countries growing faster than relatively rich countries. This is because poorer countries have greater potential for growth due to their lower level of development and can adopt and adapt technology from richer countries, leading to rapid growth. Therefore, option C is the correct choice.

Question 15

Country A and country B are the same except country A has a capital stock of 5,000 a population of 12,000 and employment of 10,000. Country B has a capital stock of 8,000 and a population of 24,000 and employment of 20,000.

Accepted Answer

Country A has a higher capital-to-labor ratio (5000/10000 = 0.5) compared to Country B (8000/20000 = 0.4), indicating a higher standard of living. However, Country B has the potential to catch up due to its larger population and employment base, which can lead to higher economic growth and capital accumulation over time.

Question 16

The logic behind the catch-up effect is that

Accepted Answer

The catch-up effect refers to the idea that countries with low incomes will experience faster economic growth rates than countries with high incomes, and the logic behind it is that new capital (such as investment in physical infrastructure, technology, and human capital) adds more to production in a country that doesn't have much capital compared to a country that already has a lot of capital. This is due to the law of diminishing returns, which states that as an input (such as capital) is added to a production process, the marginal increase in output eventually begins to decrease. Therefore, the more capital a country already has, the smaller the increase in output from additional capital investment.

Question 17

The traditional view of the production process is that capital is subject to

Accepted Answer

The traditional view of the production process posits that capital is subject to diminishing returns. This implies that as an economy accumulates more capital, each additional unit of capital adds less to output than the previous unit. Consequently, poorer countries, which have less capital to begin with, should experience faster growth when they add more capital, compared to richer countries with already substantial amounts of capital. This is because the initial units of capital in a poor country are far from the point of diminishing returns that richer countries face.

Question 18

Suppose that a country increased its saving rate. In the long run it would have

Accepted Answer

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Question 19

Two countries are the same, except one is poorer. Assuming the traditional assumption about the production function is made there are

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Question 20

Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. In the long run

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Quiz 12: Production and Growth