Question 1

The steady-state level of capital occurs when the change in the capital stock (∆k) equals:

Accepted Answer

A

Question 2

The consumption function in the Solow model assumes that society saves a:

Accepted Answer

According to the Solow model, the consumption function assumes that society saves a constant proportion of income. This is known as the "marginal propensity to save" and is denoted by the symbol 's'. The assumption of a constant savings rate is crucial to the model, as it implies that the rate of capital accumulation (investment) is proportional to the rate of economic growth in the long run.

Question 3

In this graph, when the capital-labor ratio is OA, AB represents:

Accepted Answer

C

Question 4

In the Solow growth model of Chapter 7, the saving rate determines the allocation of output between:

Accepted Answer

In the Solow growth model, the saving rate determines how much of the output is allocated to saving (and thus investment) and how much is left for consumption.

Question 5

In the Solow growth model, the assumption of constant returns to scale means that:

Accepted Answer

Constant returns to scale means that the production function exhibits constant returns to scale in capital and labor, and hence the number of workers in an economy does not affect the relationship between output per worker and capital per worker.

Question 6

In the Solow growth model of Chapter 7, the economy ends up with a steady-state level of capital:

Accepted Answer

In the Solow growth model, the economy converges to a steady-state level of capital regardless of the initial level of capital, due to the diminishing returns to capital and the adjustment of savings and investment over time.

Question 7

In the Solow growth model of Chapter 7, the demand for goods equals investment:

Accepted Answer

In the Solow growth model, the demand for goods is the sum of consumption and investment.

Question 8

Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker:

Accepted Answer

The production function with diminishing marginal product of capital implies that as the capital stock increases, the additional output gained from each additional unit of capital also decreases. Therefore, the extra unit of capital per worker in economies with higher initial capital per worker will have a smaller impact on output per worker than in economies with lower initial capital per worker. This means that the extra unit of capital in Lowland will increase output per worker more than in Highland.

Question 9

Unlike the long-run classical model in Chapter 3, the Solow growth model:

Accepted Answer

The Solow growth model is a dynamic model that describes changes in the economy over time, in contrast to the long-run classical model which is a static model that considers the economy in a single period. The Solow model focuses on the factors of production (capital and labor) and technology as sources of economic growth and considers how changes in these variables can lead to changes in output and income over time.

Question 10

In the Solow growth model of Chapter 7, for any given capital stock, the determines how much output the economy produces, and the determines the allocation of output between consumption and investment.

Accepted Answer

In the Solow growth model, the production function determines how much output (Y) the economy produces for any given capital stock (K), represented as Y = F(K). The saving rate (s) determines the amount of output allocated towards investment (I), which is necessary to increase the capital stock and sustain economic growth in the long run. Therefore, choice C correctly identifies the two factors that determine output and its allocation in the Solow growth model.

Question 11

Exhibit: The Capital-Labor Ratio

In this graph, starting from capital-labor ratio k , the capital-labor ratio will:

Accepted Answer

The slope of the production function is increasing at the current level of capital-labor ratio, meaning that additional capital will lead to proportionally more output than additional labor. This will cause an increase in the capital-labor ratio.

Question 12

The Solow growth model describes:

Accepted Answer

The Solow growth model is a dynamic model that explains how saving, population growth, and technological change impact output over time. It shows how an economy's output per capita changes as a result of changes in capital stock, labor input, and technological progress. The model assumes a fixed technology level, so it does not consider changes in the amount or quality of resources available to the economy.

Question 13

In the Solow growth model, the steady-state occurs when:

Accepted Answer

The answer of In the Solow growth model, the steady-state...

Question 14

cause(s) the capital stock to rise, while cause(s) the capital stock to fall.

Accepted Answer

Investment refers to the amount of money being put towards capital goods or assets, which increases the capital stock. Depreciation, on the other hand, refers to the decrease in value of those capital goods over time, which would cause the capital stock to fall. Therefore, choice C is the best option. The other choices may have some impact on the capital stock, but not as direct and clear as investment and depreciation.

Question 15

If capital lasts an average of 25 years, the depreciation rate is percent per year.

Accepted Answer

Depreciation rate is calculated by dividing the total depreciation by the useful life of the asset. In this case, since the average life of capital is 25 years, the depreciation rate can be calculated by dividing 100% by 25, which gives us 4%. Therefore, the correct answer is choice C.

Question 16

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the:

Accepted Answer

The slope of the graph of f(k) eventually gets flatter and flatter because as k gets larger, the change in f(k) becomes smaller and smaller relative to the change in k. This means that the rate at which f(k) is increasing (or decreasing) is slowing down.

Question 17

In the Solow model, it is assumed that a(n) fraction of capital wears out as the capital-labor ratio increases.

Accepted Answer

In the Solow model, it is assumed that a constant fraction of capital wears out each period, regardless of the capital-labor ratio. This is known as the depreciation rate of capital, which is considered to be constant over time.

Question 18

In the Solow growth model of Chapter 7, investment equals:

Accepted Answer

In the Solow growth model, investment is equal to saving, as the portion of output that is not consumed is saved and used for investment.

Question 19

The production function y = f(k) means:

Accepted Answer

The production function y = f(k) means that output per worker (y) is a function of capital per worker (k). It does not indicate anything about labor not being a factor of production or the production function exhibiting increasing returns to scale.

Question 20

In the steady state, the capital stock does not change because investment equals:

Accepted Answer

The answer of In the steady state, the capital stock...

Quiz 7: Consumers, Producers, and the Efficiency of Markets