Question 1

The Solow model predicts that, ceteris paribus, countries with higher rates of population growth will have:

Accepted Answer

The Solow model predicts that higher rates of population growth will lead to lower levels of per capita output. This is because a higher population will lead to a lower amount of capital per worker, which in turn reduces labor productivity and output per worker. Therefore, option C is the correct answer.

Question 2

Labor-augmenting technological progress, denoted as E in the textbook, enters the production function as follows:

Accepted Answer

Labor-augmenting technological progress means that technology increases the effectiveness of labor. In the production function, this is represented by multiplying labor (L) by the technology factor (E), hence the correct representation is Y = F[K, (L·E)].

Question 3

In the Solow model with a positive rate of population growth n and technological progress z, the steady state level of total real output Y grows at the rate:

Accepted Answer

In the Solow model with both population growth (n) and technological progress (z), the steady-state level of total real output (Y) grows at the rate of n + z. This is because both factors contribute to the growth of total output.

Question 4

In the Solow model with a positive rate of population growth n and technological progress z, the steady state level of per worker real output y grows at the rate:

Accepted Answer

In the Solow model, per worker real output y in the steady state grows at the rate of technological progress z. The rate of population growth n affects the level of per worker output in the steady state, but not the growth rate once the steady state is reached. Therefore, the correct choice is (C) - y grows at a rate of z.

Question 5

In the Solow model with a positive rate of population growth n and technological progress z, the steady state level of real output per effective worker y grows at the rate:

Accepted Answer

In the Solow model with positive rates of population growth (n) and technological progress (z), the steady state level of real output per effective worker (y) does not grow; it remains constant. Growth in output per effective worker is achieved before the steady state is reached. Once the steady state is achieved, increases in population and technology only serve to keep the economy moving along the steady state path without increasing the level of output per effective worker.

Question 6

In the Solow model, the steady state includes a positive rate of per capita output growth only when the model includes a positive rate of:

Accepted Answer

According to the Solow model, steady-state output per capita growth equals technological progress multiplied by the amount of capital per capita raised to the 2/3 power, minus the rate of depreciation. Since the rate of depreciation is always positive, there will only be positive steady-state output per capita growth if there is positive technological progress (which raises the productivity of existing capital) to offset the negative impact of depreciation. Therefore, choice C) is the correct answer.

Question 7

If we depict the economy, using Solow's model, in a diagram with per capita output y on one axis and the ratio of capital to labor, k, on the other, then technological progress will appear in this model as:

Accepted Answer

Technological progress in the Solow model is represented as an upward shift in the production function, indicating that for any given level of capital per worker, output per worker is higher due to improvements in technology.

Question 8

Under the assumptions that (1) labor-augmenting technological progress is equal to z and (2) the labor force grows at the rate of n, the Solow model predicts that in the steady state:

Accepted Answer

In the Solow model with labor-augmenting technological progress (rate z) and labor force growth (rate n), the steady state predictions include: output growing at the rate of n + z (A), per worker output growing at the rate of z (B), and output per effective worker being constant (C). All these statements are correct, making D the right choice.

Question 9

If a low-income country achieves the same rates of saving, depreciation, and population growth as a high-income country, and it raises its rate of technological progress to exactly that of the high-income country as well, then the Solow growth model predicts that the low-income country will:

Accepted Answer

The Solow growth model predicts that if a low-income country achieves the same rates of saving, depreciation, population growth, and technological progress as a high-income country, it will grow at the same rate as the high-income country in the long run, leading to conditional convergence. This means both countries will grow at the same rate, but it does not necessarily imply that the low-income country will reach the same level of income as the high-income country.

Question 10

The Solow model tells us that if countries have the access to the same technology and they accumulate new technology at identical rates, then any differences in per capita real output must be due to:

Accepted Answer

The Solow model explains that differences in per capita output can be attributed to differences in the variables that determine the steady state, such as δ (depreciation rate of capital), σ (share of income saved), and n (growth rate of population). Therefore, choice A is the best answer. Choice B is incorrect because the Solow model assumes that countries have access to the same technology. Choice C is incorrect because the Golden Rule level of saving is a hypothetical concept that represents the savings rate that maximizes consumption in the long-run, and it does not necessarily reflect differences in per capita output between countries. Choice D is also incorrect because the Solow model explains that differences in per capita output can exist between countries.

Question 11

The Solow model tells us that if economies have identical levels and rates of growth of technology, but different values for the steady state variables δ, σ, and n, then:

Accepted Answer

The Solow model suggests that if economies have the same levels and rates of technological growth, then they will converge to the same steady state levels of output and consumption. This implies that complete convergence can be achieved by equalizing the steady state variables, such as δ, σ, and n, which represent the rate of depreciation, the elasticity of output with respect to capital, and the rate of population growth, respectively. Therefore, by equalizing these variables, complete convergence can be achieved.

Question 12

Robert Solow designed his model as a response to:

Accepted Answer

Robert Solow designed his model as a response to the Harrod-Domar model and its assumption of a constant capital-output ratio. Solow introduced the idea of exogenous technological progress to explain why an economy can achieve sustained long-term growth without experiencing diminishing returns to capital, which was not captured by the Harrod-Domar model.

Question 13

A key feature of the Solow model is:

Accepted Answer

The Solow model incorporates the assumption of diminishing returns to the factors of production, which means that holding all other factors constant, eventually each additional unit of capital or labor will result in a smaller increase in output. This is a key feature of the model and is used to analyze the long-run growth of economies.

Question 14

If the equation Y = F(K,L) represents a constant returns to scale production function, then for any positive constant c the following must also hold:

Accepted Answer

According to the constant returns to scale property, if we increase the inputs by a constant factor c, then the output will also increase by a constant factor c. This can be represented by the equation: Y = F(K,L) implies cY = F(cK,cL). Therefore, option D is the correct choice as it represents this relationship.

Question 15

The reason that the textbook converted the basic production function as specified by Robert Solow, Y = F(K,L) to the form y = f(k), where y and k represent Y/L and K/L, respectively, is that:

Accepted Answer

The conversion to y = f(k) matches our definition of economic growth as the change in per capita output. By dividing both Y and L by L, we obtain the measure of output per unit of labor (y), which is a more relevant measure of economic growth. Additionally, by dividing K by L, we obtain the measure of capital per unit of labor (k), which allows us to analyze the relationship between output and capital in a way that is more germane to the study of long-run economic growth.

Question 16

The Solow model assumes that

Accepted Answer

The Solow model assumes that consumption is determined by a constant saving rate with a value between zero and one.

Question 17

According to Mazumdar's theory (1992) and Lewer and Van den Berg's (2001, 2003) empirical results, who gains the most from trade?

Accepted Answer

Mazumdar's theory and Lewer and Van den Berg's empirical results suggest that countries who import mainly capital goods (such as machinery and equipment) gain the most from trade. This is because these imports allow countries to improve their production efficiency and competitiveness, which leads to higher economic growth and income levels. Conversely, countries that primarily import consumption goods (such as food and clothing) do not experience as much gains from trade, as their imports do not have as much of an impact on their productivity and competitiveness. Countries that are closed and do not trade at all also do not benefit from trade.

Question 18

In the Solow model, the transition from one steady state to another is referred to as?

Accepted Answer

In the Solow model, the transition from one steady state to another due to changes in savings rate, population growth, or technological progress is often referred to as medium-run growth. This transition period is characterized by adjustments in capital accumulation and output levels until a new steady state is reached.

Question 19

In his famous article, The Myth of Asia's Miracle, Paul Krugman argued that East Asian economic growth would:

Accepted Answer

Krugman argued that East Asian economic growth would slow down in the future because many East Asian countries experienced large increases in factor accumulation and savings rates, but technological progress is slow. This means that, while they were able to accumulate capital and invest heavily in production, they were not able to develop new technologies or advance existing ones at the same pace. This would eventually lead to diminishing returns and slower economic growth.

Question 20

According to Paul Krugman, the rapid growth rates of the Asian Tigers are

Accepted Answer

According to Paul Krugman, the rapid growth rates of the Asian Tigers were the result of a transition to a higher steady-state equilibrium brought about by sharp increases in saving and their effective labor forces. This is a more realistic explanation compared to the other options. The Asian Tigers were able to achieve high savings rates, which they used to invest in capital goods leading to economic growth. Additionally, their effective labor forces were a result of investments in human capital through education, leading to increased productivity.

Quiz 3: International Trade and Factor Accumulation