Chapter 3 - Introduction to Economic Growth

Name:

True/False
Indicate whether the statement is true or false.

The standard of living of people in a country is their per capita income.

Diminishing returns to labor implies that eventually the marginal product of labor will become negative.

The marginal product of capital is how much output changes when capital increases by one unit.

Saving is income that is not consumed.

Real saving equals gross investment.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

World growth data shows that from 1960 to 2000:

a.	the US and other OECD countries grew at moderate rates.
b.	sub-Saharan African countries grew at low rates or declined.
c.	some countries particularly East Asian countries grew rapidly.
d.	all of the above.

World growth data reveals that from 1960 to 2000:

a.	the US and other OECD countries grew at moderate rates.
b.	sub-Saharan African countries grew rapidly.
c.	some countries particularly East Asian countries grew a low rates or declined.
d.	all of the above.

World growth data reveals that from 1960 to 2000:

a.	the US and other OECD countries stagnated.
b.	sub-Saharan African countries grew at low or negative rates.
c.	some countries particularly East Asian countries grew at low or negative rates.
d.	all of the above.

World growth data reveals that from 1960 to 2000:

a.	all countries grew at similar rates.
b.	sub-Saharan African countries grew moderately.
c.	some countries particularly East Asian countries grew rapidly.
d.	the US and other OECD countries stagnated.

10.

The US and other OECD countries had high levels of GDP per person in 2000 despite growing at a moderate rate from 1960 to 2000 because:

a.	of exploitation of foreign countries.
b.	their economies had grown at a moderate rate for a century or more.
c.	they stole the wealth of less developed countries.
d.	all of the above.

11.

If A in the production function Y = A • F(K,L) rises, then:

a.	output rises for any level of K and L.
b.	the marginal product of labor rises.
c.	the marginal product of capital rises.
d.	all of the above.

12.

A in the production function Y = A • F(K,L) is:

a.	the marginal product of labor.
b.	the capital to labor ratio (K/L).
c.	the marginal product of capital.
d.	the level of technology.

13.

The marginal product of labor is:

a.	how much output rises for when labor increases one unit
b.	capital divided by labor (K/L)
c.	labor divided by capital (L/K)
d.	the level of technology

14.

The marginal product of capital is:

a.	.
b.	the change in output for a unit change in capital.
c.	the slope of the production when technology and labor are held constant.
d.	all of the above.

15.

Diminishing marginal product of capital (MPK) means:

a.	output rises as capital rises.
b.	the MPK eventually falls as capital rises.
c.	output rises as the MPK rises.
d.	the marginal product of capital eventually becomes negative as capital rises.

16.

In the production function Y = A • F(K,L), L is:

a.	leisure.
b.	labor.
c.	the marginal product of labor.
d.	the marginal product of leisure.

17.

In the production function Y = A • F(K,L), Y is:

a.	good Y.
b.	production.
c.	the marginal product of good Y.
d.	constant returns to scale.

18.

Among the assumptions made about the production function Y = A • (K,L) is:

a.	diminishing marginal product of labor.
b.	constant returns to scale.
c.	diminishing marginal product of capital.
d.	all of the above.

19.

For the production function Y = A • F(K,L) constant returns to scale means:

a.	if capital and labor double output doubles.
b.	capital and labor increase at a constant rate.
c.	the marginal products of capital and labor are constant.
d.	technology is constant.

20.

If the production function Y = A • (K,L) is divided by L, then

a.	(Y/L) = A•f(K/L).
b.	output per capita equals technology times a function of the capital labor ratio.
c.	y = A•f(k).
d.	all of the above.

21.

Among the categories the growth rate is broken down into by growth accounting is:

a.	the growth rate of technology.
b.	the marginal product of capital.
c.	the capital labor ratio.
d.	all of the above.

22.

Growth accounting shows that GDP growth depends on:

a.	growth of the capital stock.
b.	holding environmental pollution in check.
c.	government purchases.
d.	having a reasonable distribution of income.

23.

Growth accounting shows that economic growth depends on:

a.	government tax receipts.
b.	the growth of the labor force.
c.	lowering environmental pollution.
d.	all of the above.

24.

Growth accounting shows that economic growth depends on:

a.	controlling environmental pollution.
b.	international cooperation.
c.	increases in technology.
d.	all of the above.

25.

Growth accounting shows that economic growth depends on:

a.	increases in technology.
b.	the growth of the labor force.
c.	growth in the capital stock.
d.	all of the above.

26.

The growth accounting formula is:

a.
b.
c.
d.	Y= A • F(K,L)

27.

The labor force participation rate is:

a.	the labor force divided into population.
b.	the labor force divide by population.
c.	the labor force times population.
d.	the labor population minus the labor force.

28.

If a country has a population of 100 million and a labor force of 60 million, then its labor force participation rate is:

a.	0.6.
b.	1.67
c.	40 million.
d.	60 million.

29.

If a country has a population of 300 million and a labor force of 200 million, then its labor force participation rate is:

a.	0.67
b.	1.5
c.	100 million.
d.	200 million.

30.

The change in the capital stock in an economy depends on:

a.	the economy’s saving.
b.	the change in bond prices.
c.	the economy’s investment.
d.	all of the above.

31.

In a closed economy with no government sector, the change in the capital stock is:

a.	net investment less depreciation.
b.	gross investment less depreciation.
c.	gross investment.
d.	nominal saving.

32.

In a closed economy with no government sector, the change in the capital stock is equal to:

a.	net investment less depreciation.
b.	nominal saving.
c.	gross investment.
d.	real saving.

33.

Depreciation of the capital stock occurs due to:

a.	machines deteriorating.
b.	real estate rising in value.
c.	bonds falling in value.
d.	all of the above.

34.

Depreciation of the capital stock occurs due to:

a.	inflation.
b.	buildings needing repair.
c.	bonds falling in value.
d.	all of the above.

35.

Depreciation of the capital stock occurs due to:

a.	deflation.
b.	vehicles requiring new parts.
c.	bonds falling in value.
d.	all of the above.

36.

Depreciation of the capital stock occurs due to:

a.	machines deteriorating.
b.	vehicles needing parts.
c.	buildings needing repair.
d.	all of the above.

37.

If there are 120 machines in an economy and the depreciation rate is 5% per year, then:

a.	depreciation is 5 machines a year.
b.	depreciation is 6 machines a year.
c.	depreciation is 115 machines per year.
d.	depreciation is 114 machines per year.

38.

If there are 120 machines in an economy and the depreciation rate is 10% per year, then next year there are:

a.	10 of the original machines left.
b.	12 of the original machines left.
c.	108 of the original machines left.
d.	110 of the original machines left.

39.

The average product of capital is:

a.
b.	Y/K.
c.	.
d.	.

	Figure 3.1

40.

In Figure 3.1 the average product of capital is:

a.	rising.
b.	constant.
c.	falling.
d.	unknown.

41.

In Figure 3.1 the marginal product of capital is:

a.	rising.
b.	declining.
c.	constant.
d.	unknown.

42.

Figure 3.1 shows:

a.	a production function with labor and technology constant.
b.	a production function with capital and labor constant.
c.	a production function with capital and technology constant.
d.	a production function with capital, labor and technology constant.

43.

In the steady state of the Solow growth model:

a.
b.
c.
d.

44.

In the Solow growth model the economy reaches the optimal k*:

a.	immediately.
b.	over a period of time.
c.	randomly.
d.	cyclically.

45.

The Solow growth model assumes unemployment is:

a.	zero.
b.	falling.
c.	rising.
d.	constant.

46.

The Solow growth model ignores:

a.	the international sector.
b.	the role of government.
c.	changes in labor force participation.
d.	all of the above.

47.

The Solow growth model shows that the growth rate of real GDP per worker depends on:

a.	the saving rate, s
b.	the growth rate of the labor force, n.
c.	the depreciation rate,.
d.	all of the above.

48.

The Solow growth model shows that the growth rate of real GDP per worker depends on:

a.	the saving rate, s
b.	government spending, G.
c.	the rate of inflation.
d.	all of the above.

49.

The Solow growth model shows that the growth rate of real GDP per worker depends on:

a.	the rate of growth of the money supply.
b.	the growth rate of the labor force, n.
c.	rate of growth of government debt.
d.	all of the above.

50.

The Solow growth model shows that the growth rate of real GDP per worker depends on:

a.	the rate of growth of the money supply.
b.	level of output in the economy.
c.	the depreciation rate, .
d.	all of the above.

51.

In the Solow growth model the optimal capital to labor ratio, K/L, is where:

a.
b.
c.
d.

52.

In the Solow growth model the steady state is when the economy has:

a.	full employment.
b.	the optimal capital labor ratio, k*.
c.	zero inflation.
d.	all of the above.

53.

During the transition to the steady state in the Solow growth model:

a.	the output per worker rises.
b.	labor force participation rises.
c.	the rate of growth of capital rises.
d.	all of the above.

54.

During the transition to the steady state in the Solow growth model:

a.	the output per worker falls.
b.	labor force participation rises.
c.	the rate of growth of capital falls.
d.	all of the above.

55.

During the transition to the steady state in the Solow growth model:

a.	the output per worker rises.
b.	the capital to labor ratio rises.
c.	the rate of growth of capital falls.
d.	all of the above.

56.

The Solow residual is:

a.	that part of output growth not attributed to labor force growth.
b.	that part of output growth not attributed to capital stock growth.
c.	that part of output growth not attributed to capital stock growth and labor force growth.
d.	the growth in output.

57.

The Solow residual is that part of output growth attributed to:

a.	the growth rate of the labor force.
b.	the growth rate of output.
c.	the growth rate of the capital stock.
d.	the grow rate of technology.

58.

The Solow residual:

a.	is not directly observable.
b.	attributed to labor force growth.
c.	is attributed to capital stock growth.
d.	is attributed to labor force growth and capital stock growth.

Short Answer

59.

What is a production function?

60.

What do constant returns to scale imply?

61.

What is the growth account formula and what does it tell us?

62.

Show why real saving equals net investment.

63.

What is the key equation of the Solow growth model and what does it say to us?