Deck 26: Long-Run Economic Growth

Question 1

Consider a closed economy with real GDP in the long run of $400, consumption expenditures of $250, government purchases of $75, and net tax revenue of $20. What is the level of national saving?

A)$95
B)$55
C)$230
D)$225
E)$75

Answer 1

E

Question 2

For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to

A)decrease and the flow of national saving to increase.
B)increase and the flow of investment to increase.
C)decrease and the flow of national saving to decrease.
D)increase and the flow of national saving to decrease.
E)increase and the flow of investment to decrease.

Answer 2

A

Question 3

In Neoclassical growth theory, average material living standards in an economy could fall when

A)additional units of labour are added to the other factors.
B)there is a decline in the population.
C)there is equal percentage growth in capital and labour inputs.
D)additional units of capital are added to the other factors.
E)technology improves.

Answer 3

A

Question 4

New theories of economic growth based on the idea that growth is endogenous

A)stress the role of knowledge and learning in the economy's rate of growth.
B)assume that the growth rate of technology is exogenous.
C)assume that the rate of growth of the economy is equal to the rate of population growth.
D)incorporate factors such as central- bank behaviour.
E)ignore the role of technology.

Question 5

Given the enormous world population growth of recent decades, the present needs and aspirations of the world's population can likely only be met through

A)reductions in the world's capital stock, as a means of controlling the exhaustion of natural resources.
B)coordination of fiscal and monetary policies.
C)enormous increases in financial capital.
D)increasing knowledge and technological improvements.
E)relatively small increases in the saving rates of the developing economies.

Question 6

Economic growth is often associated with structural change in the economy, and this change can present difficult policy challenges to governments. Which of the following government policies would be most useful at addressing the social costs of economic growth?

A)worker re- training and education programs
B)subsidies directed at Canadian manufacturing firms
C)the imposition of trade restrictions to protect Canadian jobs
D)expansionary monetary policy
E)reducing income taxes

Question 7

Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of .

A)modern capital
B)knowledge- driven technological change
C)modern labour
D)economic theory
E)more educated government policy making

Question 8

Real GDP is not a good measure of average material living standards because

A)the price level may be changing, which affects what people can afford to buy.
B)it is sensitive to the base year chosen in its calculation.
C)it does not take into account the size of the population.
D)it excludes the role of imported goods.
E)it is biased by the changes in the inflation rate.

Question 9

Which of the following statements is true of new growth theory, and not true of Neoclassical growth theory?

A)Economic growth does not have an impact on resource exhaustion.
B)It can explain improved living standards over the long term.
C)Economic growth depends only on population growth.
D)It cannot explain improved living standards over the long term.
E)Economic growth is the result of innovation.

Question 10

If a country transfers resources from the production of consumption goods to the production of capital goods, the result will be to

A)decrease the long- run growth rate.
B)raise future consumption.
C)raise current living standards.
D)raise current consumption.
E)lower future living standards.

Question 11

The Solow residual is an estimate of changes in

A)labour.
B)economic growth.
C)technology.
D)human capital.
E)physical capital.

Question 12

For a given level of national income, an increase in private consumption or government purchases will cause national saving to

A)decrease.
B)exceed investment.
C)grow at a constant rate.
D)increase.
E)remain unchanged from its initial level.

Question 13

Which of the following is the best example of the acquisition of human capital?

A)A worker receives new machinery enabling him/her to do the amount of work that was formerly done by two workers.
B)A worker communicates more quickly and accurately with suppliers because of upgrades to communications software.
C)A computer chip manufacturer introduces a faster processor for micro- computing.
D)A government- sponsored program increases the amount of investment available per worker.
E)A worker takes a training course that increases his/her productivity.

Question 14

The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually

A)increase the average product of the factor.
B)decrease the average product of the factor.
C)lead to a decrease in total output by the factor.
D)lead to an increase in the material standard of living.
E)lead to an increase in the marginal output of the factor.

Question 15

According to the Neoclassical growth model, which of the following scenarios explains improvements in long- run material living standards?

A)an increase in population
B)an increase in the stock of physical capital
C)an equal increase in both population and output
D)a decrease in unemployment rates
E)an equal increase in both population and the stock of capital

Question 16

Compared to Neoclassical growth theory, newer "endogenous growth" theories are more regarding the prospect of continuous increases in the standard of living, due in part to its emphasis on the .

A)optimistic; accelerating depletion of natural resources
B)pessimistic; endogeneity of technological change
C)optimistic; endogeneity of technological change
D)pessimistic; accelerating depletion of natural resources
E)pessimistic; increasing birth rates as a result of higher real income per capita

Question 17

Balanced growth of labour and capital in the Neoclassical growth model

A)will not increase the level of per capita GDP.
B)will result in a constant level of GDP.
C)leads to rising material living standards.
D)explains current rising per capita incomes in many countries.
E)is a natural outcome of long- run equilibrium.

Question 18

The costs of economic growth include

A)the effects on workers whose skills are made obsolete by technical change.
B)current saving must be sacrificed to increase investment in capital goods.
C)improvements in technology.
D)reduced interest rates.
E)declining future living standards.

Question 19

The Neoclassical growth model assumes that with a given state of technology,

A)increases in the use of a single factor result in constant returns.
B)growth in GDP happens only if the labour force grows more quickly than the amount of physical capital.
C)the standard of living will decrease if the labour force grows more quickly than the amount of physical capital.
D)increases in the use of a single factor bring increasing returns.
E)increases in GDP are possible only if all factors are increased at an equal rate.

Question 20

Over the long term, by far the most potent force for raising average material living standards is

A)redistributing income.
B)appropriate fiscal policies.
C)economic growth.
D)reducing inefficiencies.
E)increasing the money supply.

Question 21

If a country experiences growth in "total factor productivity", then

A)all growth in real GDP can be explained by growth in the capital stock.
B)material standards of living are falling.
C)none of the growth in real GDP can be accounted for by growth in capital and the labour force.
D)all growth in real GDP can be explained by growth in the labour force.
E)there is some growth in real GDP that cannot be accounted for by growth in capital or the labour force.

Question 22

Alleviation of poverty is easier in a growing economy mainly because

A)individuals are more likely to object to the redistribution of income when they earn more.
B)nobody has to be made worse off when the increment to income caused by growth is redistributed.
C)wage rates for low- income people are naturally rising.
D)poor individuals are relatively easier to be identified in a growing economy.
E)everyone, including the poor, benefits equally from growth.

Question 23

Consider the market for loanable funds in the long run. The national saving curve is upward sloping because an increase in the real interest rate

A)decreases the supply of private saving.
B)leads households to reduce their current consumption.
C)leads to an increase in investment demand.
D)decreases the supply of public saving.
E)leads households to increase their current consumption.

Question 24

A common measure of a country's rate of economic growth is

A)the change in output per capita.
B)the marginal efficiency of capital.
C)the level of output per capita.
D)the level of real gross domestic product.
E)the capital- output ratio.

Question 25

For a given level of national income, a decrease in government tax revenues will cause

A)an increase in national saving.
B)a decrease in consumption.
C)no effect on national saving.
D)an increase in the growth rate.
E)a decrease in national saving.

Question 26

According to the Neoclassical growth model, which of the following scenarios (other things being equal)explains progressively smaller increases in per capita GDP?

A)an equal increase in both population and the stock of capital
B)a decrease in unemployment rates
C)an increase in population
D)an increase in the capital stock
E)an equal increase in population and output

Question 27

In new theories of economic growth, "learning by doing" contributes to endogenous technological change because

A)"learning by doing" increases the marginal product of physical capital.
B)information at all stages of the design and production processes is fed upstream and contributes to further innovation.
C)new technical knowledge can be transferred at zero cost.
D)knowledge can be considered a public good.
E)knowledge can be considered a private good.

Question 28

For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a country's citizens are prepared to

A)decrease interest rates.
B)sacrifice some present consumption.
C)redistribute income.
D)increase their demand for goods and services.
E)pay more taxes.

Question 29

The "new" theories of economic growth emphasize that basic research _ to price and profit signals.

A)is directly related and product development is inversely related
B)is unaffected by but product development is directly related
C)and product development are both unrelated
D)and product development are both directly related
E)is directly related and population growth is inversely related

Question 30

Which of the equations is a correct expression for national saving in the long run when real GDP equals potential output?

A)NS = T - G
B)NS = T - G - C
C)NS = Y* - C + T - G
D)NS = Y* - C - G
E)NS = Y* - T - C

Question 31

If real income grows at approximately 2 percent per year, the number of years it will take for real income to double is approximately

A)5.
B)12.
C)24.
D)36.
E)72.

Question 32

Consuming fewer goods today in order to invest resources in capital goods is the _ of economic growth.

A)external cost
B)investment cost
C)opportunity cost
D)total cost
E)social cost

Question 33

Sustained economic growth in the long run would be fostered by

A)expansionary fiscal policy.
B)expansionary monetary policy.
C)elimination of an output gap.
D)decreasing excise taxes on consumer goods.
E)technological improvements embodied in physical or human capital.

Question 34

The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the

A)marginal product of the factor to fall.
B)average product of the factor to increase.
C)material standard of living to increase.
D)marginal product of the factor to increase but at a decreasing rate.
E)marginal product of the factor to increase at an increasing rate.

Question 35

An increase in the government budget surplus, everything else constant, will cause a(n)

A)equal increase in private consumption.
B)decrease in the growth rate.
C)equal decrease in private investment.
D)decrease in national saving.
E)increase in national saving.

Question 36

Modern or "new" theories of long- run economic growth are based on the assumptions that technological change is mainly to an economy and that investment yields marginal returns.

A)exogenous; increasing
B)endogenous; decreasing
C)exogenous; constant
D)exogenous; diminishing
E)endogenous, increasing

Question 37

Consider the competing products made by Apple (iPhone)and RIM (Blackberry). The innovation generated by these firms as a result of their intense rivalry is an example of

A)constant returns to scale.
B)decreasing marginal returns.
C)exogenous technological change.
D)endogenous technological change.
E)covert collusion.

Question 38

According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of

A)an increase in the working population.
B)a better educated labour force.
C)a growing capacity to develop and incorporate new innovations.
D)a fast- growing capital stock.
E)an increase in the availability of natural resources.

Question 39

Investment in innovation is often considered to have increasing marginal returns because

A)after the initial investment is made, subsequent investors face more difficult and expensive production problems.
B)of market development costs and the "public good" nature of knowledge.
C)innovation is mostly through "leaning by doing".
D)new products increase firms' profits.
E)R&D costs are negligible relative to firms' total costs.

Question 40

In Neoclassical growth theory, an increase in the labour force total output and total output per person.

A)increases; increases
B)leaves constant; leaves constant
C)leaves constant; reduces
D)increases; reduces
E)increases; leaves constant

Question 41

In Neoclassical growth theory, increasing the amount of capital employed in production the average standard of living as long as the marginal product of capital exceeds zero.

A)at first reduces but eventually raises
B)at first raises but eventually reduces
C)has no effect on
D)unambiguously reduces
E)unambiguously raises

Question 42

Which of the following statements concerning national saving is true?

A)An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short- run and a long- run decrease in national income.
B)An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long- run.
C)An increase in the rate of saving will always be offset by a reduction in private investment.
D)A country's saving rate is unrelated to its growth rate.
E)An increase in the rate of saving will lead to a short- run reduction in national income, but to higher economic growth in the long run.

Question 43

current increases in investment may only generate greater consumption in the distant future.

A)2 only
B)1 only
C)2 and 3
D)3 only
E)1 and 2

Question 44

Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP)is likely to have

A)trouble achieving potential real national income in the short run.
B)an AS curve moving continually to the right.
C)either a high or low growth rate depending on the investment schedule.
D)a low growth rate because sustained high investment is not possible with low saving.
E)a high growth rate because aggregate expenditure will be high out of any given income.

Question 45

In the long run, an increase in the demand for investment pushes the real interest rate, encourages saving by households, and leads to a future growth rate of potential output.

A)down; less; lower
B)up; more; higher
C)up; less; lower
D)down; less; higher
E)up; more; lower

Question 46

If per capita GDP in a richer country grows at a faster annual rate than in a poorer country,

A)the gap between their standards of living will close over time as long as the rate of population growth is higher in the poorer country.
B)the gap between their standards of living will close over time.
C)whether the gap in living standards widens or closes over time depends on the absolute size of the relative growth rates.
D)the gap between their standards of living will widen over time.
E)the difference in their living standards will not change over time.

Question 47

According to the "new" theories of economic growth, increasing marginal returns to capital investment is

A)impossible because diminishing returns are unavoidable.
B)impossible, and is thus a weak source of growth.
C)possible after initial fixed costs of innovation have been borne.
D)possible only if the capital is government- owned infrastructure.
E)possible, but only in the early stages of innovation before imitators rush in to drive prices down.

Question 48

An example of "embodied technical change" is

A)better methods of inventory control.
B)the replacement of old computer chips with new ones designed for faster processing.
C)the strengthening of social infrastructure, such as delivery of basic health- care services.
D)education that teaches a wider portion of the labour force basic numeracy.
E)the development of better intellectual property law.

Question 49

Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5 percent each and total output (Y)increases by 5 percent as a result, then this production function is displaying

A)diminishing marginal returns.
B)a change in technology.
C)constant returns to scale.
D)increasing returns to scale.
E)decreasing returns to scale.

Question 50

The four fundamental determinants of economic growth include all of the following EXCEPT:

A)growth in financial capital
B)growth in the labour force
C)growth in physical capital
D)growth in human capital
E)technological improvement

Question 51

Consider the Neoclassical growth model. The effect of an increase in population (or the labour force)in an economy, with everything else held constant, is

A)an increasingly aging population.
B)a decrease in the capital- output ratio.
C)an inward shift of the production possibilities boundary.
D)an increase in per capita national income.
E)a decrease in per capita output.

Question 52

Resource exhaustion is not considered to be among the main factors that limit economic growth because

A)there are limitless supplies of resources, at high enough prices.
B)resources can be obtained from other planets as technology advances.
C)different types of inputs are used in production over time.
D)the population growth rate is decreasing over time and projected to be negative in the future.
E)technological advances change the nature of production over time and also make more resources available for extraction.

Question 53

"Embodied technical change" is said to occur when

A)innovations in the organization of production take place which do not involve changes in the form of capital used.
B)older capital equipment is replaced with different, more productive, capital.
C)techniques of managerial control are improved.
D)the capital- labour ratio is increasing.
E)the labour force acquires new skills that can be used across a wide range of industries.

Question 54

In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever

A)larger decreases in GDP and large decreases in living standards.
B)smaller increases in GDP and living standards.
C)larger levels of unemployment but larger increases in the standard of living.
D)larger levels of unemployment but small increases in the standard of living.
E)larger increases in GDP but smaller decreases in living standards.

Question 55

The main properties of a Neoclassical aggregate production function are and .

A)decreasing returns to scale; diminishing marginal returns
B)increasing returns to scale; diminishing marginal returns
C)constant returns to scale; diminishing marginal returns
D)increasing returns to scale; increasing marginal returns
E)constant returns to scale; constant marginal returns

Question 56

An aggregate production function exhibits increasing returns to capital when

A)a one percent decrease in capital produces an increase in the marginal product of capital.
B)each additional unit of capital increases the number of jobs by more than one percent.
C)a one percent increase in capital produces no change in output.
D)no change in capital produces a one percent increase in output.
E)each additional unit of capital has a higher marginal product than the previous unit.

Question 57

An important social cost of economic growth is

A)the increasing inequality of income that usually accompanies sustained growth.
B)the sacrifice of current consumption required for a higher level of future consumption.
C)the destruction of jobs due to labour skills of certain workers becoming obsolete.
D)the associated inflation.
E)the associated frictional unemployment.

Question 58

If the government has a budget deficit of $400 and the country's level of national saving is $200, then private saving must be

A)$600.
B)- $400.
C)$800.
D)$400.
E)$200.

Question 59

Long- run economic growth can help alleviate the problems of poverty by

A)creating new low- paying jobs for the unemployed.
B)reallocating income away from low- value production to increase the incentives for high- value production.
C)generating more resources that can be used to reduce income inequality.
D)requiring increased saving on the part of most of the population.
E)increasing future consumption for the middle class.

Question 60

The "new" theories of economic growth emphasize that the pace of technological change is to economic signals, and that it is to the economic system.

A)unresponsive; exogenous
B)unresponsive; endogenous
C)responsive; exogenous
D)responsive; endogenous
E)unresponsive; unrelated

Question 61

For a given level of private saving, a decrease in the government's budget deficit the long- run rate of economic growth.

A)will diminish
B)will reduce
C)will increase
D)will leave unchanged
E)none of the above

Question 62

Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP)tend to be countries

A)with a negative relationship between investment and the rate of economic growth.
B)with high rates of economic growth.
C)with the highest levels of per capita GDP.
D)with the lowest rate of national saving.
E)with the highest levels of GDP.

Question 63

An aggregate production function exhibits constant returns to scale when a one percent increase in labour input

A)along with a one percent decrease in capital produces the same amount of output.
B)along with a one percent increase in capital produces the same amount of output.
C)produces a one percent increase in output.
D)along with a one percent increase in capital produces one percent more output.
E)induces a one percent increase in capital input.

Question 64

One of the benefits of long- run economic growth is

A)decreased current saving and increased current consumption.
B)increased future interest rates.
C)decreased productive capacity.
D)a greater ability to reduce inequality.
E)growth in nominal GDP greater than real GDP.

Question 65

The compounding of economic growth rates means that

A)consumers should not save, given the low real returns that compounding produces.
B)a large increase in investment today has little effect on national income over the long run.
C)a 10 percent annual rate of return will double an investment in less than 6 years.
D)a 2 percent annual growth rate of GDP will double national income in 27 years.
E)small changes in sustained growth rates can have a significant impact on national income over several decades.

Question 66

A person who returns to school to improve her computer skills is an example of an increase in

A)technological capital.
B)the labour force.
C)physical capital.
D)human capital.
E)financial capital.

Question 67

In new theories of "endogenous growth", increasing marginal returns to investment can occur because

A)early investors create an infrastructure favorable to followers.
B)many investments require large fixed costs, the benefits of which are not available to subsequent firms.
C)little risk is associated with the process of innovation for technological followers
D)investment costs for followers can be higher than for pioneers.
E)knowledge provides the input that allows investment to be profitable.

Question 68

The aggregate production function shows the for given levels of labour and capital inputs.

A)returns to scale
B)the production possibilities boundary
C)marginal product of capital
D)marginal product of labour
E)total output for society (real GDP)

Question 69

In the long run, changes in average material living standards are best shown by

A)growth in real per capita GDP.
B)population growth.
C)improvements in fiscal policy.
D)improvements in monetary policy.
E)growth in real GDP.

Question 70

For a given level of private saving, an increase in the growth of government purchases will likely the economy's long- run growth rate.

A)slow down
B)increase
C)not affect
D)accelerate
E)-- not enough information to know

Question 71

In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in

A)decreasing GDP and falling living standards.
B)increasing GDP and increasing living standards.
C)increasing GDP and falling living standards.
D)decreasing GDP and increasing living standards.
E)increasing savings and increasing living standards.

Question 72

If GDP in a richer country grows at the same annual rate as in a poorer country, the

A)gap between their standards of living will widen over time.
B)difference in their living standards will not change over time.
C)gap between their standards of living will close over time.
D)gap between their standards of living will close over time as long as the rate of population growth is lower in the richer country.
E)gap between their standards of living will close over time as long as the rate of population growth is lower in the poorer country.

Question 73

In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by

A)increasing GDP and constant living standards.
B)increasing GDP and increasing living standards.
C)increasing GDP and falling living standards.
D)decreasing GDP and increasing living standards.
E)decreasing GDP and falling living standards.

Question 74

In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to

A)increasing GDP and increasing living standards.
B)increasing GDP and falling living standards.
C)increasing GDP and decreased national wealth.
D)decreasing GDP and increasing living standards.
E)decreasing GDP and falling living standards.

Question 75

One important assumption of the Neoclassical growth model is that, with a given state of technology,

A)increases in the use of a single factor result in constant returns.
B)increases in the use of single factor bring diminishing returns.
C)the return from successive units of a single factor increases over time.
D)increases in GDP are possible only if all factors are increased at an equal rate.
E)increases in the use of a single factor bring increasing returns.

Question 76

The theory of economic growth concentrates on the over the long run, not on .

A)factor utilization rates; growth of real GDP
B)growth of investment in capital goods; short- run fluctuations of investment
C)factor utilization rates; growth of the supplies of factors
D)growth of potential output; fluctuations of output around potential
E)growth of real GDP; growth of potential GDP

Question 77

Consider an aggregate production function Y = F(K, L)that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then

A)there are constant returns to scale.
B)each additional unit of labour will add more to total output than the previous unit of labour.
C)there are increasing returns to scale.
D)each additional unit of labour will add less to total output than the previous unit of labour.
E)total output increases in proportion to the increases in labour.

Question 78

The Neoclassical theory of economic growth led economics to be referred to as the "dismal science". The explanation for this reference lies in the theory's emphasis on

A)increasing government intervention in the economy.
B)diminishing returns in production.
C)the immoral behaviour of firms.
D)increasing damage to the environment.
E)growing inequality of income.

Question 79

Of the variables listed below, the best measure of a nation's average material standard of living is

A)percent change in nominal GDP.
B)per capita real GDP.
C)nominal GDP.
D)real GDP.
E)per capita nominal GDP.

Question 80

Consider the market for loanable funds in the long run. The investment demand curve is downward sloping because

A)a decrease in the real interest rate reflects a higher opportunity cost to firms of using loanable funds.
B)all components of desired investment are negatively related to the real interest rate.
C)an increase in the real interest rate leads to an increase in investment demand.
D)an increase in the real interest rate reflects a lower opportunity cost to firms of using loanable funds.
E)all components of desired investment are positively related to the real interest rate.