Deck 13: Why Do Economies Grow

Question 1

Recall the Application about the effect of global warming on economic growth to answer the following question(s).
According to this Application, over time, as economies adapt to higher temperatures,

A)approximately half the decline in per capita income disappears.
B)approximately half the increase in per capita income disappears.
C)per capita income does not seem to change.
D)real income begins to increase and per capita income begins to decrease.

Answer 1

approximately half the decline in per capita income disappears.

Question 2

Suppose the annual growth rate of GDP in Belize is 3.5 percent. In 20 years, GDP in Belize will double

A)1 time.
B)1.5 times.
C)3.5 times.
D)7 times.

Answer 2

1 time.

Question 3

Over time, a countryʹs real GDP per capita typically

A)shrinks
B)grows.
C)remains stable.
D)increases and decreases randomly.

Answer 3

grows.

Question 4

Using the rule of 70, if the GDP per capita growth rate in the United States is 4.4 percent, standards of living double every

A)6.72 years.
B)15.91 years.
C)44 years.
D)65.6 years.

Question 5

Recall the Application about the effect of global warming on economic growth to answer the following question(s).
According to this Application, the economic effects of increases in temperature seem to

A)be confined to poorer countries.
B)be confined to richer countries.
C)be equal across all countries.
D)be nonexistent in most countries.

Question 6

Suppose the annual growth rate of GDP in Nepal is 5 percent. In 35 years, GDP in Nepal will double

A)1.75 times.
B)2.5 times.
C)7 times.
D)24.5 times.

Question 7

When comparing the measure of goods and services of one country to that of another, economists generally compare

A)the real GDP.
B)the real GDP per capita.
C)the real GDP and net exports.
D)the real GDP and the labor force.

Question 8

Using the rule of 70, if the GDP per capita growth rate in the United States is 3.5 percent, standards of living double every

A)20 years.
B)24.5 years.
C)35 years.
D)70 years.

Question 9

Suppose real GDP was 100 in year 1 and 105 in year 2. The growth rate of real GDP is

A)0.5 percent.
B)1.5 percent.
C)2.5 percent.
D)5 percent.

Question 10

Recall the Application about the effect of global warming on economic growth to answer the following question(s).
According to this Application, a study of municipalities in Latin and South America found that a one degree Celsius rise in temperature was associated with

A)no measurable change in per capita income.
B)a small decline in real income and a small increase in per capita real income.
C)a slight increase in municipal per capita income.
D)a decline in municipal per capita income.

Question 11

An increase in a countryʹs capital stock relative to its work force is known as

A)capital deepening.
B)capital growth.
C)capital improvement.
D)capital augmentation.

Question 12

GDP per capita means GDP

A)in real terms.
B)adjusted for inflation.
C)per person.
D)divided by the capital stock.

Question 13

According to the text, _______ is perhaps the most critical aspect of a countryʹs economic performance.

A)growth in GDP
B)the inflation rate
C)the unemployment rate
D)the living standard

Question 14

Technological progress occurs when the economy gets more output

A)without any more capital or labor.
B)by using more capital per worker.
C)by using more capital but not more workers.
D)by using more labor but not more capital.

Question 15

Suppose real GDP was 120 in year 1 and 156 in year 2. The growth rate of real GDP is

A)5.6 percent.
B)18 percent.
C)30 percent.
D)36 percent.

Question 16

Suppose that real GDP starts at 100 and grows at a rate of 10 percent per year for two years. In the third year real GDP would be

A)110.
B)110.1.
C)120.
D)121.

Question 17

If the growth rate for GDP was 9 percent and GDP in year 1 was 100, then GDP in year 2 would be

A)90.
B)109.
C)190.
D)199.

Question 18

Recall the Application about the effect of global warming on economic growth to answer the following question(s).
According to this Application, a one degree Celsius rise in temperature

A)increases poor countriesʹ exports.
B)decreases poor countriesʹ exports.
C)increases rich countriesʹ exports.
D)decreases all countriesʹ exports.

Question 19

If the growth rate for GDP was 5 percent and GDP in year 1 was 140, then GDP in year 2 would be

A)133.3.
B)135.
C)145.
D)147.

Question 20

Suppose that real GDP starts at 200 and grows at a rate of 9 percent per year for two years. In the third year real GDP would be

A)183.49.
B)236.
C)237.62.
D)239.24.

Question 21

The real GDP per capita allows economic comparison between countries.

Question 22

In making accurate comparisons of GDP across countries, it is important to take differences in _______ into account.

A)population size
B)the average age of the population
C)family size
D)all of the above

Question 23

Capital deepening is the only mechanism by which economies can grow.

Question 24

Most economists believe that convergence of GDP per capita _______ between developed nations and _______ between developing and developed nations.

A)has occurred; has occurred
B)has not occurred; has occurred
C)has occurred; has not occurred
D)has not occurred; has not occurred

Question 25

Suppose that one country has a GDP that is ten percent of its richer neighbor, but the poorer country is growing at a rate of eight percent per year while the richer country is growing at a rate of two percent per year. Which country will be richer in 60 years?

Question 26

A comparison of the average growth rates across time for developed nations indicates that

A)nations with lower levels of income grow more slowly than those with higher levels of income.
B)nations with lower levels of income will never be as rich as nations with high levels of income.
C)nations with high levels of income experience a continuously increasing growth rate.
D)nations with lower levels of income grow more quickly than those with higher levels of income.

Question 27

Which of the following creates difficulties in making comparisons of real GDP across nations?

A)Each nation has a different population.
B)Nations produce different goods and services.
C)Relative prices differ sharply across countries.
D)Nations often have different languages.

Question 28

If real GDP is 100 in year 1, and grows at a rate of 3 percent per year for 9 years, what will the GDP be in 9 years?

Question 29

Why is it difficult to make accurate and valid comparisons of real GDP or GNP for different countries, and how do the World Bank and the IMF deal with these difficulties?

Question 30

If a nation with a low level of GDP per capita converges to a richer nation, the poor nation

A)experiences low growth rates.
B)enters into a free trade agreement with the richer nation.
C)experiences a rate of high growth such that its GDP per capita increases to that of the richer nation.
D)experiences a rate of low growth such that its GDP per capita increases to that of the richer nation.

Question 31

Explain the two basic mechanisms that increase GDP per capita over the long term.

Question 32

Explain the economic concept of convergence.

Question 33

Nations with low levels of GDP per capita may converge to richer nations if

A)nations with high levels of income experience a continuously increasing growth rate.
B)nations with lower levels of income grow more quickly than those with higher levels of income.
C)nations with lower levels of income spend less on investment.
D)nations with lower levels of income grow more slowly than those with higher levels of income.

Question 34

Technological progress is one of the mechanisms by which economies can grow.

Question 35

Convergence refers to closing the gap in _______ between poorer countries and richer countries.

A)real GDP
B)real GDP per capita
C)the growth rate in real GDP
D)the growth rate in real GDP per capita

Question 36

At a 3.5 percent annual growth rate it would take 20 years for GDP per capita to double.

Question 37

If an economy grows at 6 percent per year, how many years would it take for real GDP to double?

Question 38

If a firm increases its use of capital while holding constant the number of workers employed, the firm is said to experience

A)capital augmentation.
B)investment deepening.
C)labor intensity.
D)capital deepening.

Question 39

Economists who have studied economic growth find strong evidence of convergence.

Question 40

Decreases in the stock of capital will lead to

A)increases in wages and total GDP.
B)decreases in wages and increases in GDP.
C)increases in wages and decreases in GDP.
D)decreases in wages and GDP.

Question 41

The stock of capital _______ with any gross investment and _______ with any depreciation.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 42

As the stock of capital grows there will typically be _______ depreciation.

A)less
B)more
C)the same amount of
D)no

Question 43

Increases in net investment generally result in

A)lower levels of capital stock and lower levels of depreciation.
B)lower levels of capital stock and higher levels of depreciation.
C)higher levels of capital stock and higher levels of depreciation.
D)higher levels of capital stock and lower levels of depreciation.

Question 44

Gross investment minus depreciation is equal to

A)gross domestic product.
B)net investment.
C)personal investment.
D)nominal investment.

Question 45

Which of the following uses of tax revenues collected by the government leads to increased capital deepening?

A)building roads
B)increased foreign aid
C)Medicare payments
D)Social Security payments

Question 46

Suppose that for a given firm, the increase in output resulting from the last worker hired is less than the increase in output of the previous worker hired. This is an example of

A)diminishing returns.
B)constant returns.
C)increasing return.
D)capital deepening.

Question 47

In a simple economy without government or foreign trade)where output can be purchased only by consumers or by firms, saving must equal

A)investment.
B)depreciation.
C)consumption.
D)income.

Question 48

In the short run, if the stock of capital _______ there will be more depreciation.

A)grows
B)declines
C)remains stable
D)grows, declines, or remains stable

Question 49

Gross investment minus net investment is equal to

A)depreciation.
B)nominal investment.
C)real investment.
D)consumption.

Question 50

To determine the change in the capital stock, the level of new investment must be adjusted for depreciation because some new investment

A)is not used immediately.
B)merely replaces existing, but worn out, capital.
C)replaces existing workers.
D)is more efficient than existing capital.

Question 51

Recall the Application about the relationship between economic growth and income inequality to answer
the following question(s). In the United States, inequality-as measured by the income share of the top 10
percent of families-increased from 40 percent at the beginning of the 1920s to 45 percent through the end
of the Great Depression. The share fell to 32 percent by 1944 and did not begin to increase again until the
early 1970s.
According to this Application, compared to pre-war levels of inequality, wage and price controls during World War II decreased differentials in wages and salaries, and thereby _______ inequality.

A)increased
B)eliminated
C)reduced
D)did not change

Question 52

The factor that ultimately determines the change in the stock of capital, the level of real wages, and the output of an economy is

A)the labor force.
B)net investment.
C)the unemployment level.
D)GDP.

Question 53

Increases in the stock of capital are the result of decreases in

A)gross investment.
B)depreciation.
C)net investment.
D)all of the above

Question 54

If the stock of capital of a nation is _______ while the population _______, the nation can produce more output, but output per worker falls.

A)fixed; decreases
B)declining; decreases
C)fixed; increases
D)fixed; remains stable

Question 55

Capital deepening causes _______ in the demand for labor.

A)an increase
B)a decrease
C)no change
D)either an increase or decrease

Question 56

An increase in the capital stock will

A)shift the production function downward.
B)shift the production function upward.
C)flatten the production function.
D)steepen the production function.

Question 57

In a simple economy without government or foreign trade, any income not consumed is called

A)investment.
B)net investment.
C)saving.
D)depreciation.

Question 58

Recall the Application about the relationship between economic growth and income inequality to answer
the following question(s). In the United States, inequality - as measured by the income share of the top 10
percent of families - increased from 40 percent at the beginning of the 1920s to 45 percent through the end
of the Great Depression. The share fell to 32 percent by 1944 and did not begin to increase again until the
early 1970s.
According to this Application, based on the inequality measurements for the United States from the 1920s to the 1970s, economic growth and increases in inequality are

A)directly related.
B)inversely related.
C)first directly related and eventually inversely related.
D)not necessarily related.

Question 59

Recall the Application about the relationship between economic growth and income inequality to answer
the following question(s). In the United States, inequality-as measured by the income share of the top 10
percent of families-increased from 40 percent at the beginning of the 1920s to 45 percent through the end
of the Great Depression. The share fell to 32 percent by 1944 and did not begin to increase again until the
early 1970s.
According to this Application, based on the inequality measurements for the United States from the 1920s to the 1970s, inequality

A)does not naturally accompany economic development.
B)is unrelated to a nationʹs tax system.
C)is dependent on a nationʹs growth rate.
D)decreases as a country develops.

Question 60

Net investment plus depreciation is equal to

A)gross depreciation.
B)gross domestic product.
C)gross exports.
D)gross investment.

Question 61

The point of diminishing returns means that output will decrease at an increasing rate.

Question 62

Assuming full employment, if the private sector saves 8 percent of its income and the government raises taxes by $500 to finance public investments, total investment will increase by
$460.

Question 63

An economy is better off with an increase in the stock of capital.

Question 64

Nations that borrow from abroad to support current investment will

A)always be better off in the future.
B)always sacrifice future consumption.
C)be better off in the future if the investments are profitable.
D)sacrifice future consumption only if the investments are profitable.

Question 65

Suppose consumers save 17 percent of their incomes. If the government collects 10 dollar in taxes from each taxpayer and invested it in infrastructure, total social investment will _______ per taxpayer.

A)increase by $10.17
B)increase by $8.30
C)decrease by $1.70
D)decrease by $8.30

Question 66

Why does depreciation decrease the stock of capital?

Question 67

Nations that borrow from abroad to support current consumption

A)will always be better off in the future.
B)will always sacrifice future consumption.
C)may sacrifice future consumption.
D)will always sacrifice current consumption.

Question 68

In a simple economy without government or the foreign sector, saving must equal investment because output is divided into consumption and investment, and income is either consumed or saved.

Question 69

If the government _______ taxes to pay for spending on infrastructure, the result will most likely be a(n) _______ in capital deepening.

A)increases; increase
B)decreases; increase
C)increases; decrease
D)eliminates; elimination

Question 70

Will increased imports of supercomputers for industry promote economic growth?

Question 71

Trade deficits always lead to future decreases in consumption if the trade deficits

A)support current investment.
B)support current consumption.
C)support either current investment or current consumption.
D)require borrowing from abroad.

Question 72

Suppose consumers save 5 percent of their incomes. If the government collects 100 dollars in taxes from each taxpayer, private saving will _______ per taxpayer.

A)increase by $105
B)decrease by $95
C)decrease by $5
D)decrease by 95 cents

Question 73

Draw a graph showing the effect of an increase in the saving rate on the production function.

Question 74

Suppose consumers save 3 percent of their incomes. If the government collects 1 dollar in taxes from each taxpayer, private saving will _______ per taxpayer.

A)decrease by 3 cents
B)decrease by 97 cents
C)increase by $1
D)increase by 97 cents

Question 75

A larger labor force will allow the economy to produce more total output.

Question 76

If a country runs a trade deficit to finance increased current consumption, it will have to increase consumption in the future to pay back its borrowings.

Question 77

Which of the following uses of tax revenues collected by the government leads to increased capital deepening in the United States?

A)providing food to a nation suffering from a famine
B)foreign aid given to Mexico to build new schools
C)higher salaries for members of Congress
D)subsidizing airport construction in Seattle

Question 78

Explain the impact of capital deepening on workers.

Question 79

Suppose consumers save 8 percent of their incomes. If the government collects 4 dollar in taxes from each taxpayer and invested it in infrastructure, total social investment will _______ per taxpayer.

A)increase by $ 4.32
B)increase by $3.68
C)increase by 32 cents
D)decrease by 64 cents

Question 80

Explain the effect of trade deficits on economic growth.