Question 1

If the investment rate in Indonesia is 29 percent of GDP,which of the following combinations is consistent with the Harrod-Domar growth model?

Accepted Answer

According to the Harrod-Domar growth model, the rate of economic growth is proportional to the ratio of investment (I) to the incremental capital output ratio (ICOR). Mathematically, the formula can be written as:
GDP growth rate = I/ICOR
Given that the investment rate in Indonesia is 29 percent of GDP, we can calculate the ICOR as follows:
ICOR = I / (GDP growth rate)
ICOR = 0.29 / (GDP growth rate)
Now, looking through the answer choices, only option B satisfies this condition:
ICOR = 2.86 (approx.)
GDP growth rate = 0.29 / ICOR = 0.29 / 2.86 = 0.1014 or 10.14% per annum
Therefore, the best choice is B, with an ICOR of 2.86 and a GDP growth rate of 5.1 percent per annum.

Question 2

In the Solow model,an increase in the population growth rate leads to:

Accepted Answer

An increase in the population growth rate leads to a lower average income per worker in the Solow model because it increases the labor force faster than the capital stock, leading to a lower capital-to-labor ratio and consequently lower output per capita.

Question 3

Growth depends on which two processes?

Accepted Answer

Accumulating assets and making them more productive is essential for growth. This can include investing in physical capital (such as factories and equipment) and human capital (such as education and training) to increase productivity and output.

Question 4

Suppose the saving rate for a low-income country is given.If production becomes less capital intensive,the ICOR will ________ and the growth rate will _________.

Accepted Answer

ICOR (Incremental Capital Output Ratio) is the amount of capital needed to generate an additional unit of output. If production becomes less capital intensive, that means the same amount of output can be produced with less capital. Thus, the ICOR will decrease. A lower ICOR usually leads to higher economic growth rates because it means that capital is being used more efficiently. Therefore, the growth rate will increase.

Question 5

One of the problems of the Harrod-Domar framework is that its fixed-proportion production function does not allow for any:

Accepted Answer

The fixed-proportion production function assumes a fixed ratio of inputs (labor and capital) and does not allow for any substitution between them. This is a major limitation of the Harrod-Domar framework as in reality, firms can adjust the mix of inputs in response to changes in relative prices, technology, or other factors. The other options (population growth, endogenous technical change, and depreciation) are not directly related to the fixed-proportion production function assumption.

Question 6

Unlike isoquants for a fixed-coefficient production function,the isoquants for a neoclassical production function:

Accepted Answer

Isoquants for a neoclassical production function are curved because this production function allows for substitution between capital and labor. As the proportion of capital and labor changes, the marginal rate of technical substitution (MRTS) also changes, resulting in curved isoquants. The other options are not true for neoclassical production functions.

Question 7

Consider the Harrod-Domar relationship for an economy: g = (s/v)- d
Assume that the depreciation rate is 0.If the saving rate is 24 percent,the ICOR is 3,and the depreciation rate is 5 percent,the economy can be expected to grow:

Accepted Answer

Using the Harrod-Domar relationship, we have g = (s/v)- d, where 
g = growth rate of the economy
s = saving rate 
v = ICOR (incremental capital-output ratio)
d = depreciation rate

Substituting the given values, we get: 
g = (0.24/3) - 0.05 
g = 0.08 - 0.05 
g = 0.03 or 3%

Therefore, the expected growth rate of the economy is 3%. The correct choice is C.

Question 8

The capital-output ratio provides an indication of the:

Accepted Answer

The capital-output ratio reflects the amount of capital needed to produce a unit of output and therefore provides an indication of the capital intensity of the production process. It does not relate to the limits of growth, a country's production function or the health and educational level of the population.

Question 9

According to the Solow model,the relationship between saving and growth is not linear because of:

Accepted Answer

The Solow model argues that there is a limit to how much capital can contribute to economic growth, known as diminishing returns to capital. As more capital is accumulated, the additional output produced by each additional unit of capital invested becomes smaller and smaller. Therefore, the relationship between saving and growth is not linear, but rather exhibits decreasing marginal productivity. This means that as savings increase, the additional economic growth generated from those savings declines, eventually reaching a point where savings no longer contribute to growth. The other options (coordination failures, business cycles, and macroeconomic policy) may impact economic growth, but they do not explain the non-linear relationship between saving and growth described in the Solow model.

Question 10

The most unsettling conclusion of the Solow model is the conclusion that once the economy reaches its long-run potential level of income,economic growth simply:

Accepted Answer

According to the Solow model, once an economy reaches its long-run potential level of income, the growth rate becomes zero. This means that the economy will match population growth, but there will be no sustained increases in the average income per person. Therefore, option B is the correct answer. Options A, C, and D are incorrect as they are not supported by the Solow model.

Question 11

Because of population growth,Ghana's GNP must grow by 1.5 percent per year just to avoid a decline in average standards of living.With an ICOR of 6.0,achieving this minimum-growth target requires a saving rate of:

Accepted Answer

The Incremental Capital-Output Ratio (ICOR) indicates the amount of investment needed to generate a unit increase in output. To maintain the standard of living with a 1.5% growth in GNP, given an ICOR of 6.0, the required saving rate is calculated as: Required growth rate (1.5%) * ICOR (6.0) = 9%.

Question 12

The father of modern growth theory is:

Accepted Answer

Robert Solow is widely considered the father of modern growth theory. He developed the neoclassical growth model in the 1950s, which formed the basis of much of the subsequent research in the field. His work emphasized the importance of technological progress in driving long-run economic growth.

Question 13

While there is no evidence of absolute convergence,there is strong evidence today of conditional convergence in which:

Accepted Answer

Conditional convergence is the idea that countries with similar characteristics (such as levels of human capital or institutional quality) experience similar rates of economic growth, and eventually catch up with richer countries. While there is no evidence of absolute convergence (which would mean that all countries converge to the same income level over time), there is strong empirical support for conditional convergence.

Question 14

Which of the following statements is true about new growth theories and the Solow and Harrod-Domar models?

Accepted Answer

New growth theories and the Solow and Harrod-Domar models underline the importance of factor accumulation (such as capital and labor) and productivity in the growth process. However, they differ in how they treat technology, externalities, and returns to scale.

Question 15

From 1999-2007,Thailand's economy experienced an annual growth rate of:

Accepted Answer

Thailand's economy experienced an annual growth rate of 3.9 percent from 1999-2007.

Question 16

Every model of economic growth embodies:

Accepted Answer

Aggregate production functions are a common feature of most models of economic growth, as they provide a framework for analyzing the relationship between inputs and outputs in an economy. Risk theory, isoquant maps, and Adam Smith's theories may also be relevant in some models, but they are not necessarily included in all of them.

Question 17

According to the Harrod-Domar model,what effect does an increase in the saving rate have on long-term growth?

Accepted Answer

According to the Harrod-Domar model, an increase in the saving rate leads to an increase in long-term growth. This is because higher levels of saving allow for greater investment in capital which in turn leads to increased productivity and economic growth.

Question 18

When an economy increases the amount of capital per worker,it is called:

Accepted Answer

When an economy increases the amount of capital per worker, it is called capital deepening. This means that more or better machinery, tools, and equipment are made available to each worker, increasing their productivity and potentially leading to economic growth.

Question 19

Consider the Harrod-Domar relationship for an economy: g = (s/v)- d
Assume that the depreciation rate is 0.A country can only save 15 percent but wants to grow 15 percent.Assuming the ICOR is 3,the gap of ________ should be provided by foreign aid.

Accepted Answer

Using the Harrod-Domar relationship, we have g = (s/v) - d.
Since the depreciation rate is zero, g = s/v. 
If the country wants to grow at a rate of 15 percent, we have g = 0.15. 
We also know that the country can save only 15 percent, so s/v = 0.15. 
The ICOR is given as 3. 
So, we have g/ICOR = (s/v)/ICOR, which gives us (0.15)/3 = 0.05 as the amount of investment needed to achieve a growth rate of 15 percent. 
However, the country can only save 15 percent, which is not enough to cover the required investment. 
Therefore, the remaining gap of 0.05 should be provided by foreign aid, which is 10 percent of the required investment (0.05/0.15 = 1/3, so 1/3 of the required investment is 0.05, making the total investment 0.15, of which 0.10 is foreign aid). 
Hence, the answer is A) 10 percent.

Question 20

IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Level of output,rate of change

Accepted Answer

The answer of IDs and Paired-Concept Questions
These terms can be...

Quiz 4: Theories of Economic Growth