Deck 27: The Classical Long-Run Policy Model: Growth and Supply-Side Policies

Question 1

People's knowledge is a type of capital, called human capital.

Answer 1

True

Question 2

According to Say's Law, people:

A)supply goods in order to obtain other goods.
B)supply goods in order to accumulate profits.
C)demand goods in order to maximize their welfare.
D)demand goods so they can supply them to others.

Answer 2

supply goods in order to obtain other goods.

Question 3

Modern macroeconomics developed as an attempt to explain:

A)long-run growth.
B)persistent inflation.
C)balance of trade problems.
D)short-run business cycles.

Answer 3

short-run business cycles.

Question 4

The Classical growth model argues that markets are an impediment to growth because they lead to unequal distribution of income.

Question 5

Other things equal, according to the Classical growth model, if Malaysia saves more than Thailand, Malaysia should grow faster than Thailand.

Question 6

An economy grows when its population increases.

Question 7

Adam Smith stressed specialization and division of labor as causes of economic growth.

Question 8

The U.S.economy experienced the Great Depression in the:

A)1910s.
B)1920s.
C)1930s.
D)1940s.

Question 9

The idea behind Say's Law is that people work because:

A)they like to work.
B)they want to buy things.
C)they want to accumulate wealth.
D)work gives them social status.

Question 10

According to new growth theory, the primary source of growth is capital.

Question 11

Macroeconomics emerged as a separate subject largely in response to:

A)Adam Smith's The Wealth of Nations.
B)Alfred Marshall's distinction between the long run and short run.
C)Irving Fisher's development of the quantity theory of money.
D)John M.Keynes's explanation of business cycles.

Question 12

The study of economic growth focuses on the factors that cause:

A)an economy to move along its production possibility curve.
B)an economy's production possibility curve to shift out.
C)an economy to move from a point inside its production possibility curve to a point on this curve.
D)an economy's production possibility curve to shift in.

Question 13

We can show economic growth in terms of the production possibility curve by:

A)movement along the production possibility curve.
B)shifting from a point inside the curve to a point on the production possibility curve.
C)shifting the production possibility curve outward.
D)jumping to a point outside the production possibility curve.

Question 14

Small differences in economic growth rates can eventually produce large differences in living standards because of compounding.

Question 15

Most economists explain China's growth after 1980 as primarily due to a more educated population.

Question 16

Classical growth theory argued that economic growth was limited because of diminishing marginal productivity.

Question 17

Diminishing marginal productivity implies that a proportional increase in all inputs will produce a less than proportional increase in output.

Question 18

New growth theory emphasizes the contribution of technology to growth more than Classical growth theory.

Question 19

A concern about long-run economic growth was important in economics:

A)from the time of Adam Smith and his The Wealth of Nations.
B)from the time of Karl Marx and his Das Kapital.
C)from the time of John M.Keynes and his General Theory.
D)only since the 1970s.

Question 20

As a result of the Great Depression, economic thought placed greater emphasis on:

A)long-run growth.
B)short-run fluctuations.
C)international transactions.
D)the problem of inflation.

Question 21

Robert Lucas reflects the view of many economists when he argues that the most effective way to reduce world poverty is to:

A)eliminate recessions.
B)increase long-run growth.
C)provide loans to developing countries.
D)take money from those who are very wealthy and give to those who are very poor.

Question 22

The Rule of 72 implies that a country with a growth rate of 2 percent:

A)will never double its income.
B)will double its income in about 7 years.
C)will double its income in about 36 years.
D)will double its income in about 50 years.

Question 23

Economic growth:

A)does not affect living standards at all.
B)has a relatively small effect on living standards over long periods of time.
C)has a relatively large effect on living standards over long periods of time.
D)is the sole determinant of living standards over any time period.

Question 24

Small differences in growth rates can create large differences in income levels because of:

A)specialization.
B)compounding.
C)the division of labor.
D)Say's Law.

Question 25

The Rule of 72 implies that a country with a growth rate of 8 percent will double its income in about:

A)4 years.
B)6 years.
C)9 years.
D)12 years.

Question 26

Market economies have been successful in leading to economic growth because they have:

A) allowed companies that pollute to avoid paying any penalty for doing so.
B) ignored private property rights.
C) channeled individual efforts toward production and growth.
D) taken advantage of increased government subsidies.

Question 27

Suppose Botswana doubles its income in 6 years while South Africa doubles its income in 9 years.According to the Rule of 72, the growth rate in Botswana is:

A)3 percentage points higher than the growth rate in South Africa.
B)4 percentage points higher than the growth rate in South Africa.
C)8 percentage points higher than the growth rate in South Africa.
D)12 percentage points higher than the growth rate in South Africa.

Question 28

The Rule of 72 implies that a country with a growth rate of 6 percent will double its income in about:

A)6 years.
B)8 years.
C)12 years.
D)16 years.

Question 29

Specialization allows individuals to:

A)broaden their skill base.
B)become more self-sufficient.
C)focus their attention on one aspect of production.
D)better understand the entire production process.

Question 30

Compounding means that changes in living standards depend:

A)only on the initial level of income.
B)only on the accumulation of changes in income since the initial year.
C)on both the initial level of income and the accumulation of changes in income every year since the initial year.
D)on neither the initial level of income nor the accumulation of changes in income since the initial year.

Question 31

Markets help to promote growth by:

A)increasing specialization and the division of labor.
B)reducing specialization and the division of labor.
C)encouraging self-sufficiency.
D)undermining a nation's comparative advantage.

Question 32

The effect of specialization and the division of labor is to make us:

A)more productive and more dependent on others.
B)more productive and less dependent on others.
C)less productive and more dependent on others.
D)less productive and less dependent on others.

Question 33

The Rule of 72 implies that a country will double its income in about 18 years if its growth rate is:

A)4 percent.
B)6 percent.
C)8 percent.
D)12 percent.

Question 34

According to new growth theory, the primary source of growth is:

A) entrepreneurship.
B) government intervention in the market place.
C) technology.
D) capital.

Question 35

Economic growth causes:

A)the production possibility curve to shift in.
B)the production possibility curve to shift out.
C)a movement toward the production possibility curve.
D)a movement away from the production possibility curve.

Question 36

The Rule of 72 implies that a country will double its income in about 9 years if its growth rate is:

A)4 percent.
B)6 percent.
C)8 percent.
D)11.1 percent.

Question 37

The Rule of 72 implies that a country will double its income in about 4 years if its growth rate is:

A)8 percent.
B)12 percent.
C)18 percent.
D)25 percent.

Question 38

Suppose Thailand grows at a rate of 8 percent, Malaysia grows at a rate of 6 percent, and both countries have the same initial per capita output level.Using the rule of 72, it follows that in 36 years Thailand's per capita output will be:

A)25 percent larger than Malaysia's per capita output.
B)33 percent larger than Malaysia's per capita output.
C)50 percent larger than Malaysia's per capita output.
D)100 percent larger than Malaysia's per capita output.

Question 39

Which of the following is a potential cost of long-run growth?

A) Increased unemployment
B) Resource exhaustion
C) Higher trade surplus
D) Higher budget deficits

Question 40

Say's Law allows growth theorists to:

A)ignore aggregate demand and focus only on aggregate supply.
B)ignore aggregate supply and focus only on aggregate demand.
C)assume that aggregate supply is determined by aggregate demand.
D)assume that aggregate demand is always less than aggregate supply.

Question 41

If per capita output increases by 5 percent and output grows by 3 percent, the population must be:

A)falling at a rate of 8 percent.
B)falling at a rate of 2 percent.
C)increasing at a rate of 2 percent.
D)increasing at a rate of 8 percent.

Question 42

If a country's population is 10 million and its GDP is $113 billion, its per capita output is:

A)$113.13.
B)$1,130
C)$11,300.
D)$113,000.

Question 43

If per capita output increases by 3 percent and output grows by 4 percent, the population must be:

A)falling at a rate of 7 percent.
B)falling at a rate of 1 percent.
C)increasing at a rate of 1 percent.
D)increasing at a rate of 7 percent.

Question 44

If per capita output falls by 2 percent and population grows by 3 percent, output:

A)falls by 5 percent.
B)falls by 1 percent.
C)grows by 1 percent.
D)grows by 5 percent.

Question 45

Which of the following is not likely to contribute to economic growth?

A)Institutions with incentives compatible with growth.
B)Technological development.
C)Entrepreneurship.
D)Government planning.

Question 46

Financial markets are a key institution of growth because:

A)without them people would not save.
B)without them there would be no incentive to invest.
C)they move funds from those who save to those who invest.
D)they allow people to plan better for retirement.

Question 47

What effect would we expect in the market for loanable funds if people increase their saving?

A)Supply will shift right and demand will not change.
B)Supply will shift left and demand will not change.
C)Demand will shift right and supply will not change.
D)Demand will shift left and supply will not change.

Question 48

If per capita output increases by 2 percent and population grows by 3 percent, output:

A)falls by 5 percent.
B)falls by 1 percent.
C)grows by 1 percent.
D)grows by 5 percent.

Question 49

If a country's population is 30 million and its GDP is $8.5 billion, its per capita output is:

A)83.
B)$850.
C)$2,830.
D)$8,500.

Question 50

Historically, the effect of economic growth generally has been to make:

A)the poor poorer and the rich richer.
B)the poor richer and the rich poorer.
C)all income levels richer.
D)the rich richer but not affect the poor.

Question 51

If output increases by 2 percent and population growth is 3 percent, per capita output:

A)falls by about 5 percent.
B)falls by about 1 percent.
C)grows by about 1 percent.
D)grows by about 5 percent.

Question 52

Historically economic growth through the market has:

A)on average hurt the poor.
B)not affected the poor.
C)helped both rich and poor.
D)helped the poor at the expense of the rich.

Question 53

If output increases by 5 percent and population growth is 3 percent, per capita output grows by about:

A)2 percent.
B)3 percent.
C)5 percent.
D)8 percent.

Question 54

The growth produced by markets:

A)makes everyone better off and improves the distribution of income as well.
B)affects the wealthy more than it affects the poor.
C)makes the average person better off but may worsen the distribution of income.
D)affects the level of income but not its distribution.

Question 55

If a country's population is 5 million and its output is 195 billion, its per capita output is:

A)$1,960.
B)$9,800.
C)$19,960.
D)$39,000.

Question 56

If median income is unchanged from one year to the next, then per capita income:

A)is also constant.
B)is increasing.
C)is decreasing.
D)could be increasing, decreasing, or constant.

Question 57

Per capita growth:

A)occurs only when the population is growing.
B)occurs only when output is growing.
C)occurs when there is an increase in goods and services per person.
D)always improves the distribution of income.

Question 58

If the distribution of the gains from growth matters, growth in median income is:

A)a more informative measure of growth than growth in per capita income when the distribution of income is equitable .
B)a more informative measure of growth than growth in per capita income when the gains from growth are concentrated on a small segment of the population.
C)the same as growth in per capita income.
D)a less informative measure of growth than growth in per capita income.

Question 59

What effect would we expect in the market for loanable funds if some people discover a new business opportunity that requires investment?

A)Supply will shift right and demand will not change.
B)Supply will shift left and demand will not change.
C)Demand will shift right and supply will not change.
D)Demand will shift left and supply will not change.

Question 60

What prediction about growth would most economists make if a government enacts a tax on all transactions in financial markets?

A)The tax would increase growth because it would encourage people to leave the unproductive financial sector and move to a useful sector of the economy.
B)The tax would probably have no effect on growth because it would not affect capital or technology.
C)The tax would reduce growth because it would make it harder for those with productive opportunities to obtain funds from savers.
D)The effects would depend on whether it was borne primarily by the rich or by the poor.

Question 61

Growth compatible institutions:

A)have incentives built into them that lead people to put forth effort.
B)encourage people to pursue activities that inhibit growth in others.
C)allow people to gain income for themselves by creating impediments for others.
D)encourage people to spend a lot of time in leisure pursuits.

Question 62

Over the last three decades, the Chinese government has adopted a series of market-oriented reforms that have shifted control of many parts of the Chinese economy from government officials to private individuals.These reforms have most likely stimulated China's growth for which of the following reasons?

A)They have provided individuals with a greater incentive to be efficient
B)They have decreased domestic competition
C)They have increased economies of scale
D)They have decreased entrepreneurship

Question 63

In the early 2000s, analysts feared that low academic achievement in math in the United States may reduce U.S.economic growth by as much as half a percentage point per year.In terms of factors leading to growth, the low math scores indicate that the U.S.may be at a growing disadvantage in terms of:

A)social capital.
B)human capital.
C)growth-compatible institutions.
D)technology.

Question 64

The Indian government is known for creating obstacles to foreign investment with tariffs, investment caps and tons of red tape.What effect does "red tape" have on growth?

A)It discourages entrepreneurship
B)It discourages leisure
C)It encourages learning by doing
D)It encourages specialization

Question 65

If legally owning a business can spur growth, why don't all business owners legalize their businesses?

A)Excessive regulations often make running a legalized business more cumbersome.
B)Legally owning a business opens new avenues for obtaining loans.
C)Legalizing a business has no impact on business practices, so why do it?
D)Business owners don't care about economic growth.

Question 66

When the government of India lowered tariff barriers and removed the need for approvals for routine industrial expansion, what source of growth did this reform change directly?

A)Physical capital
B)Human capital
C)Technology
D)Growth-compatible institutions

Question 67

Many economists now de-emphasize capital accumulation as a source of growth because:

A)capital accumulation no longer affects growth.
B)capital accumulation alone does not necessarily lead to growth.
C)the value of the capital stock no longer depends upon technology and needs of society.
D)capital has been defined so narrowly that it has become a less useful concept.

Question 68

All of the following are important sources of growth except:

A)institutions with incentives compatible with growth.
B)technological development.
C)decreasing returns to scale.
D)capital accumulation.

Question 69

Which of the following would tend to inhibit growth?

A)Private property
B)Limited liability for corporate owners
C)Requiring government to approve all economic activity
D)Freedom from regulation

Question 70

Suppose that consumers decide to save less and spend more.What effect would this have in the market for loanable funds?

A)It will increase interest rates and the quantity of funds lent will rise.
B)It will decrease interest rates and the quantity of funds lent will rise.
C)It will increase interest rates and the quantity of funds lent will fall.
D)It will decrease interest rates and the quantity of funds lent will fall.

Question 71

Which of the following is an example of the development of human capital?

A)Designing robots used to manufacture cars
B)Contributing to well-developed financial markets
C)Conducting on-the-job training
D)Fostering trust among firms that allows short-term credit

Question 72

One reason why the Soviet Union grew slowly in the 20th century compared to the United States and Western Europe was that it:

A)did not invest as much in capital goods.
B)invested in too many consumer goods.
C)licensed too many private enterprises, creating destructive competition.
D)did not provide incentives for individuals to produce what consumers valued.

Question 73

The legal system is an example of:

A)social capital.
B)physical capital.
C)human capital.
D)entrepreneurial capital.

Question 74

Some economists argue that well-functioning capital markets that allow funds to move from those who have but do not need funds to those who need but do not have funds, are essential for rapid economic growth.Well-functioning capital markets are an example of:

A)physical capital.
B)human capital.
C)growth-compatible institutions.
D)entrepreneurship.

Question 75

A resource the United States lacked in the 20th century and had to import was:

A)minerals.
B)land.
C)labor.
D)technological creativity.

Question 76

Steven Landsburg has suggested that Scrooge, a character invented by Charles Dickens, was not really so bad.What could Landsburg be suggesting would happen in the market for loanable funds if all the misers of the world sold their assets and gave the money to the poor?

A)Supply would shift left, causing investment to fall.
B)Supply would shift right, causing interest rates to rise.
C)Demand would shift left, causing investment to fall.
D)Demand would shift right, causing interest rates to rise.

Question 77

In the early 2000s, analysts feared that low academic achievement in math in the United States may reduce U.S.economic growth by as much as half a percentage point per year.This "drag will become increasingly apparent…as other countries dismantle regulatory obstacles and alter tax laws that put them at a disadvantage." In terms of sources of growth, the quotation suggests that some other countries are currently at a disadvantage because of:

A)social capital.
B)human capital.
C)growth-compatible institutions.
D)technology.

Question 78

Haiti has a lower literacy rate (the percentage of those over 15 who can read and write) compared to other Latin American and Caribbean countries.Where does this low literacy rate fit into the factors that explain the wealth of nations?

A)It indicates that Haiti is short of physical capital.
B)It shows that it lacks entrepreneurship.
C)It shows a lack of natural resources.
D)It indicates that Haiti is short on human capital.

Question 79

Suppose that a business discovers an opportunity that requires funds to exploit.What effect would this have in the market for loanable funds?

A)It will increase interest rates and the quantity of funds lent will rise.
B)It will decrease interest rates and the quantity of funds lent will rise.
C)It will increase interest rates and the quantity of funds lent will fall.
D)It will decrease interest rates and the quantity of funds lent will fall.

Question 80

Factory buildings are an example of:

A)social capital.
B)physical capital.
C)human capital.
D)entrepreneurial capital.