Deck 14: Supply-Side Policies and Economic Growth

Question 1

Which of the following is a fundamental insight from Robert Solow's neoclassical model of economic growth?

A) Higher savings will lead to higher investment, higher capital per worker and higher growth.
B) In equilibrium, capital per worker will exceed output per worker.
C) Economic growth will not keep increasing; it will reach a steady state.
D) Economic growth rates in developing economies will fall, while growth rates in modern

Answer 1

Economic growth will not keep increasing; it will reach a steady state.

Question 2

As of 2008, which of the following statements is true of labour utilization and productivity in developed economies?

A) The UK economy's labour productivity is higher than the productivity of labour in the US.
B) The utilization rate of French labour is lower than the UK's labour utilization rate.
C) Since per capita incomes are almost the same in the UK and France, their labour productivity rates must be the same.
D) The productivity of labour in the US economy is lower than labour productivity in France.

Answer 2

The utilization rate of French labour is lower than the UK's labour utilization rate.

Question 3

According to Solow, which of the following is true when the economy is at growth rate equilibrium?

A) Output remains constant while labour increases.
B) Both output and capital remain constant.
C) Both labour and capital grow at the same rate.
D) Labour remains constant while capital increases.

Answer 3

Both labour and capital grow at the same rate.

Question 4

The long-run aggregate supply curve implies that:

A) in?ation can be lowered by reducing aggregate supply.
B) increases in aggregate demand will be in?ationary.
C) aggregate demand needs to increase in order for the economy to grow.
D) supply is highly responsive to changes in the price level.

Question 5

For fully developed economies in Europe, the main avenue for economic growth is through _____.

A) ?scal and monetary policies
B) an increase in the supply of labour
C) productivity improvements
D) a reduction in the use of capital

Question 6

The aggregate supply curve is _____.

A) the sum of all ?rms' marginal cost curves (above average variable cost)
B) downward sloping at all levels of output
C) perfectly elastic at all levels of output
D) the same as the sum of all ?rms' average total cost curves

Question 7

Economic growth is measured as the:

A) percentage change in GDP per year.
B) percentage change in in?ation per year.
C) difference between the aggregate supply and aggregate demand per year.
D) growth rate of population per year.

Question 8

Which of the following measures the productivity of an economy?

A) Capital per unit of labour.
B) GDP per hour worked.
C) Cost per unit of output.
D) Labour per unit of capital.

Question 9

The neoclassical model of economic growth suggests that:

A) growth rates between rich and poor countries will converge.
B) rich countries will get richer and poor countries will get poorer.
C) in equilibrium, the quantity of capital will be greater than the quantity of labour.
D) higher savings will lead to economic growth in the long run.

Question 10

Which of the following statements is true?

A) When aggregate supply is perfectly elastic, increases in aggregate demand will be in?ationary.
B) Economic growth that results from an increase in aggregate supply also increases the rate
C) Demand-side policies reduce the difference between actual and potential GDP and can only close the output gap.
D) Real expansion of the economy involves an increase in aggregate demand.

Question 11

If the UK increases its level of labour productivity, this would mean that:

A) labour could earn the current level of income for fewer hours worked.
B) output would fall as the number of hours worked will decline.
C) the number of hours worked would be higher in the UK than in other countries.
D) the same level of output will be produced in a higher number of hours.

Question 12

Assuming that the supply of labour is inelastic, which of the following factors will prevent diminishing returns in an economy?

A) An increase in income tax rates.
B) A fall in the quantity of capital employed per worker.
C) An increase in the employment of capital.
D) An increase in the amount of output used in the renewal of existing capital.

Question 13

Assuming that the economy is producing at full employment, an increase in demand by households leads to:

A) an increase in the price level.
B) a fall in the level of output produced.
C) an increase in inventories held by producers.
D) an inward shift of the production possibilities curve.

Question 14

The long-run aggregate supply curve will shift to the right when:

A) economic factor inputs increase.
B) the general price level increases.
C) the unemployment level increases.
D) labour productivity falls.

Question 15

Which of the following will lead to economic growth by increasing aggregate supply?

A) An increase in the wage level in the economy.
B) A fall in aggregate demand.
C) An increase in the productivity of labour.
D) An increase in interest rates in the economy.

Question 16

Economic growth will _____.

A) shift the long-run aggregate supply curve to the right
B) make the long-run aggregate supply curve ?atter
C) shift the long-run aggregate supply curve to the left
D) make the long-run aggregate supply curve steeper

Question 17

If the number of workers in the economy increase, but the level of capital is kept constant:

A) the economy will experience diminishing returns.
B) the total productivity of the economy will improve.
C) the rate of return on capital will increase.
D) the marginal productivity of labour will become positive.

Question 18

Thomas Malthus' prediction that population would outgrow its supply of food did not materialize because:

A) the supply of land remained constant.
B) technical progress in agriculture improved.
C) the growth rate of population exceeded the growth rate of GDP.
D) the increase in the stock of capital did not keep pace with the increase in the population.

Question 19

Which of the following shifts the long-run aggregate supply curve to the right?

A) A decrease in the quantity of factor inputs.
B) A decrease in input prices.
C) A fall in labour productivity.
D) A decrease in the natural level of GDP.

Question 20

According to the neoclassical model of economic growth, which of the following is true?

A) Higher savings will lead to higher investment, higher capital per worker and higher growth in the long run.
B) One of the reasons why economic growth slows is because output needs to be used for
C) If the labour force is growing at 10 per cent, then capital has to grow by more than 10 per cent to keep capital per worker constant.
D) As long as more capital is added per worker, economic growth will keep increasing even in

Question 21

Which of the following changes in the labour market in the UK have helped increase e?ciency and productivity in the economy?

A) Trade unions have begun to seek greater collaborative relationships with ?rms.
B) The workforce in the UK has a relatively high proportion of university graduates.
C) The minimum wage in the UK has been increased by a rate that exceeds the rate of in?ation.
D) The number of workers attached to a registered trade union in the country have increased.

Question 22

Which of the following policies would provide incentives to undertake research in new productive processes?

A) Restricting the immigration of highly-skilled workers into the economy.
B) Limiting the number of workers that can be made redundant at a ?rm.
C) Providing tax breaks on directors' remuneration packages for high-technology industries.
D) Undertaking large-scale deregulation of the ?nancial services industry.

Question 23

The neoclassical model of growth is an example of a(n) _____.

A) exogenous growth theory
B) endogenous growth theory
C) population growth theory
D) uni?ed growth theory

Question 24

An economy can experience increasing growth rates over time because of:

A) investments with positive externalities.
B) expansionary ?scal policies.
C) higher savings, investment and capital per worker.
D) expansionary monetary policies.

Question 25

Which of the following is a result of an increased level of higher education in an economy?

A) Advanced productive capital can be employed by ?rms.
B) The pace of technological development will slow.
C) The demand for low-skilled workers will increase.
D) The number of machines employed per worker will increase.

Question 26

According to the endogenous growth theory, when a single ?rm makes an investment that has positive externalities:

A) productivity will increase across many ?rms in the economy.
B) the economy will experience diminishing returns to capital.
C) a greater proportion of economic output will be needed to renew the existing capital.
D) the economy will reach a steady state growth rate.

Question 27

What does the stakeholder perspective of the ?rm state?

A) Each stakeholder within a ?rm should pursue its own individual interest.
B) The overarching aim of the ?rm should be to safeguard the interest of its largest
C) Firms are a collection of interest groups, each of which needs to work with and recognize the needs of others.
D) To increase productivity, governments should be made stakeholders in ?rms.

Question 28

Which of the following is true of education in the UK (GBR)?

A) The UK has a very large percentage of low-skilled workers compared to other developed economies.
B) The individuals who are not entering university in the UK are receiving the same skills
C) Since the UK has an under-skilled set of workers, it is easy to pursue innovative products or employ advanced production techniques.
D) The UK has one of the workforces with the lowest percentage of graduates.

Question 29

Which of the following policies would increase ?rms' adaptability to technological developments in the economy?

A) Reducing the level of redundancy payments to workers.
B) Increasing the size of the labour force in the economy.
C) Providing tax breaks for research and development.
D) Strengthening trade unions through legislation.

Question 30

What does the convergence hypothesis state?

A) Since they have a high ratio of capital per worker, rich countries will always grow faster than poor countries.
B) Poor countries will grow at a rate that is higher than the average rate of economic growth.
C) Rich and poor countries will exhibit persistent disparities in economic growth rates.
D) Since they have a low ratio of capital per worker, poor countries will always grow slower

Question 31

The convergence hypothesis assumes that industrialized countries will grow at a slower rate because:

A) diminishing returns in the short run will eventually leads to economies of scale in the long run.
B) with high capital per worker ratios, increasing investment will be required to replace old
C) most industrialized countries have a low ratio of capital per worker.
D) most industrialized countries operate at a high level of underemployment.

Question 32

Endogenous growth theory considers models in which:

A) investments by a single ?rm has negative externalities for other ?rms in the economy.
B) the steady state growth rate can be affected by economic behaviour and policy.
C) the government distorts incentives and structures, leading to market failure.
D) growth is determined by labour force growth and chance inventions.

Question 33

Which of the following is ignored by exogenous models of economic growth?

A) The incentives and institutions that can foster and promote technological development.
B) The fact that growth is determined by technological development.
C) The effect of an increase in labour on the capital per worker ratio.
D) The fact that economic output is needed to renew existing capital.

Question 34

How do strong trade unions and legislation that limits redundancies affect the economy?

A) Opportunities to use advanced technology or new capital machinery may be blocked by trade unions.
B) The level of wages paid to workers in the economy may fall below the subsistence wage.
C) Ine?cient practices in the economy can be removed easily, leading to increases in productivity.
D) Economic resources can easily be allocated according to where they are valued the most.

Question 35

Endogenous growth models advocate:

A) labour force growth and chance inventions to boost productivity.
B) the use of government policy to develop the economy.
C) demand-side policies to increase potential GDP and economic growth.
D) low capital per worker ratios to increase economic growth.

Question 36

In the neoclassical model of economic growth, technological development:

A) is endogenous.
B) does not affect productivity.
C) is determined outside the model.
D) is affected by economic growth.

Question 37

Which of the following is a criticism of the neoclassical model of economic growth?

A) The model assumes that there will be increasing returns to capital, which is incorrect.
B) In the real world, convergence between rich and poor countries has not been observed.
C) The model incorrectly assumes that growth affects technology and that technology also affects growth.
D) The assumption that increasing capital per worker will lead to economic growth is

Question 38

How does an endogenous growth model differ from an exogenous model of economic growth?

A) An exogenous model suggests that governments have a role in developing the economy while an endogenous model ignores the role of the government.
B) An exogenous growth model assumes that technological development takes place outside
C) An endogenous model suggests that rich and poor economies will converge over time while an exogenous model suggests that convergence will not occur.
D) An exogenous model suggests that high capital per worker ratios are preferable while an

Question 39

The UK has many educated managers, but an under-skilled set of workers who choose not to attend university. What would this imply for the UK's economy?

A) The provision of university education in the UK is not adequate.
B) The government needs to encourage strong trade unions and pro-labour legislation.
C) Workers may be ill-equipped to adapt advanced production techniques or innovative products.
D) The labour market requires cultural and regulatory change.

Question 40

Which of the following is an example of a government policy that is aimed at increasing positive externalities?

A) Increasing the size of the labour force.
B) Improving access to education and training.
C) Preventing redundancies by making trade unions stronger.
D) Introducing import tariffs for various goods.

Question 41

Which of the following is a disadvantage of using a private ?nance initiative?

A) Private ?rms are very cost-effective when building infrastructure projects.
B) Project and budget overruns are usually minimized when the private sector undertakes a
C) Firms in the private sector can raise funds at a lower rate than the government.
D) Private providers may become insolvent, leaving the government to ?nish the project.

Question 42

Which of the following is an example of a private ?nance initiative?

A) The government pays an annual leasing fee to a private to build and own roads.
B) A private ?rm issues an initial public offering (IPO) to raise funds to build a hospital.
C) The government uses its tax revenues to build a bridge, which it owns.
D) A private ?rm purchases a nationalized industry from the government.

Question 43

Which of the following would explain why higher savings in an economy do not always lead to higher investments?

A) Domestic savings in an economy could be lent to ?rms overseas.
B) The ?nancial services industry could be highly deregulated.
C) The individuals in the economy could have a high marginal propensity to save.
D) The savings could be used to increase the ratio of capital per worker.

Question 44

Which of the following is true of the BRIC economies?

A) The BRIC economies are operating on the inelastic portion of the aggregate supply curve.
B) The BRIC economies are operating on the elastic portion of the aggregate supply curve.
C) The BRIC economies face a perfectly elastic aggregate demand curve.
D) The BRIC economies face a perfectly inelastic aggregate demand curve.

Question 45

Which of the following is true of the automobile market in the BRIC economies?

A) Cars which have become less preferable in developed economies may sell well in the BRIC economies.
B) More than 70 per cent of the driving age population in the BRICs owns a car.
C) The scope for car consumption in the BRICs is very limited.
D) Luxury cars form a large portion of the auto market in the BRICS.

Question 46

Which of the following should be a concern for foreign consumer goods companies seeking to invest in China?

A) The markets for consumer goods and electronics in China are highly saturated.
B) The growth of the Chinese economy is driven by domestic consumption.
C) Wage rates in China are relatively high because of a shortage of labour.
D) The gains from export growth in China have ?owed to ?rms rather than workers.

Question 47

Reducing personal taxation rates might not raise productive output if:

A) the marginal propensity to consume is high in the economy.
B) individuals value leisure time more than they do income.
C) there is a high level of income inequality in the economy.
D) the government is running a trade surplus.

Question 48

Which of the following is a bene?t of a private ?nance initiative?

A) Commercial organizations are better at understanding and managing ?nancial risk.
B) The initial transaction costs can be extremely high as it takes time to ?nalize the contract.
C) Firms in the private sector can raise funds at a lower rate than government.
D) Project and budget overruns are usually high for projects undertaken by ?rms in the

Question 49

What is meant by privatization?

A) Privatization refers to the sale of nationalized industries to private companies.
B) Privatization refers to the sale of private companies to the public sector.
C) Privatization refers to the purchase of one private company by another private company.
D) Privatization refers to the process of expanding the scale of operations to exploit

Question 50

The BRIC economies _____.

A) face inelastic aggregate supply curves.
B) operate at a point over their production possibility frontiers.
C) face inelastic aggregate demand curves.
D) operate at a point under their production possibility frontiers.

Question 51

By cutting personal taxation rates in the 1980s, the UK government was attempting to:

A) encourage individuals to save more to help the economy grow.
B) provide individuals with incentives to work longer and raise output.
C) reduce the size of its ?scal de?cit.
D) increase the multiplier effect of a rise in aggregate demand.

Question 52

Economic growth in BRIC economies is likely to be accompanied by:

A) high unemployment.
B) high rates of in?ation.
C) low rates of in?ation.
D) low levels of investment.

Question 53

Which of the following is true for the BRIC economies?

A) The strength of the Russian economy is built on technological expertise and an abundance of labour.
B) The growth of the Brazilian economy depends on access to important forestry and energy
C) India's economy is technologically capable and is reaping the bene?ts of vast energy resources.
D) The mainstay of China's economy is its low-skill, high-wage workers.

Question 54

_____ enhance(s) investment by acting as an intermediary between savers and borrowers.

A) The ?nancial services industry
B) Firms
C) Consumers
D) The government

Question 55

Which of the following is true of gross capital formation?

A) Gross capital formation shows the level of household consumption in the economy.
B) Gross capital formation measures for the increase in the government's assets.
C) The level of gross capital formation in China and India is very low.
D) Gross capital formation measures the increase in tangible assets in the economy.

Question 56

If workers valued income over leisure, a cut in personal tax rates would:

A) reduce the pro?ts of ?rms as workers would opt to work fewer hours.
B) reduce the supply of labour in manufacturing industries.
C) reduce the total level of savings in the economy.
D) increase the number of hours worked in the economy.

Question 57

_____ measures the value of additional assets created in an economy, less disposals of old assets.

A) Deferred capital
B) Depreciation
C) Net present value
D) Gross capital formation

Question 58

Suppose gross capital formation as a percentage of GDP is low but the economic growth rate is high. Which of the following can be inferred about the economy from this information?

A) The services sector forms a large proportion of the GDP of the economy.
B) The level of private sector investment in assets like buildings, factories and equipment is
C) The proportion of output that is used for renewal of existing capital is likely to be low.
D) The manufacturing sector forms a large proportion of the GDP of the economy.

Question 59

If a major proportion of the additional income generated in an economy goes into household consumption:

A) the value of intangible assets in the economy will increase.
B) the value of old assets that are disposed will fall.
C) the economy's potential GDP will increase.
D) the level of gross capital formation will be low.

Question 60

Which of the following could suggest that concerns about infringements of intellectual property rights may be misplaced?

A) It is di?cult to prosecute ?rms and individuals in the countries where the infringements of intellectual property rights takes place.
B) Innovation is predominately funded and carried out by commercial enterprises.
C) Innovation is successful only if consumers are venturesome and willing to take advantage of the new technology.
D) Government, industry and universities in developed economies invest billions in building

Question 61

The total number of hours worked measures the productivity of an economy.

Question 62

Economic growth will occur when there is an increase in labour productivity in an economy.

Question 63

Strong and influential trade unions enhance the ability of firms to exploit new technological developments.

Question 64

Endogenous growth models imply that governments can influence the long-run rate of economic growth.

Question 65

Empirical evidence supports the convergence hypothesis.

Question 66

A supply-side policy attempts to increase economic growth through monetary policy.

Question 67

Private finance initiatives involve the national or local government building and owning a public infrastructure project with funds raised from the private sector.

Question 68

A country that has a low ratio of capital per worker needs less output to renew existing capital as compared to a country with a high ratio of capital per worker.

Question 69

Industrial networks develop positive externalities by providing firms with support industries.

Question 70

According to Solow's model, economic growth will not continue to increase over time.

Question 71

Light touch regulation of the ?nancial services sector was encouraged in order to increase liquidity in the economy and spur innovation in ?nancial instruments.

Question 72

The convergence hypothesis implies that countries with lower levels of income will grow slower than wealthier countries.

Question 73

Increasing the level of education in the economy will allow more advanced productive capital to be employed by firms.

Question 74

Neoclassical growth theory assumes that growth depends on technology which is endogenously determined.

Question 75

Compared to countries like Germany and France, the UK has a high level of low-skilled workers.

Question 76

The positive externalities of investments made by firms make constant returns to capital possible in the long run.

Question 77

The financial services industry enhances growth by acting as an intermediary between savers and borrowers.

Question 78

According to the convergence hypothesis, all countries will eventually have the same level of income.

Question 79

Without insurance, firms would be less willing to invest, leading to a reduction in growth rates.

Question 80

Privatization positively affects the economy.