Econ 302 Midterm #1
When a lower-income economy's GDP is able to "catch up" with a higher-income economy's GDP, this behavior is related to an important concept in the study of economic:
Convergence
In the Solow model, if we define s bar as the saving rate, Tt as output, and It as investment, consumption, Ct, is given by
Ct = (1-s bar)Yt
The rule of 70 states that if yt grows at a rate of g percent per year, then the number of years it takes yt to
double is approximately equal to 70/g
Suppose population growth is given by Lt = L0 (1+n)^t, where L0 is the population today, Lt is the population in t periods, and n bar is the population constant growth rate. If we do not know what value n bar takes but do know the values of L0, Lt and t, then we can calculate n bar by punching _______ into our calculators
n bar = (Lt/L0)^1/t -1
the equation s bar F(K,L) - d bar K, is called
net investment
Among the Organization for Economic Co-operation and Development (OECD) countries, those that were relatively ________ in 1960 ____________ between 1960 and 2010
poor; grew quickly
Consider the following model of the labor market from the text: Labor supply: Ls = a bar x w + b bar Labor demand: Ld = f bar - w The endogenous variables are
the equilibrium quantity of labor, L*, and wage w*
To get a more accurate view of the size countries' economies, we first need to convert each country's GDP to the dollar using _______ and then adjust for _______.
the exchange rate; price level differences
The principle of transition dynamics can be summarized as
the further below its steady state an economy is, the faster that the economy will grow
If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates remain unchanged, the Slow model predicts that the economy will grow and eventually reach
the same steady-state level of output as it would have before the disaster
Immediately following the increase in the saving rate, output grows rapidly. As the economy approaches its new steady state, the growth rate
will gradually decline
According to the constant growth rate rule, if a variable starts at some initial value y0 at t = 0 and grows at a constant rate g bar, then the value of the variable in three periods is given by
y3 = y0(1 + g bar)^3
If NGDP is nominal GDP and P is the price level, which of the following can be used to calculate the growth of the real GDP?
Percent change in NGDP - percent change in P
Which of the following best answers whether growth in the labor force leads to overall economic growth?
Population growth can produce growth in the Solow model in the aggregate but not in output per person
The two main inputs we consider in a simple production function are:
capital and labor
In the Slow model, if we assume that capital depreciation rates are the same across all countries, differences in per capita output can be explained by
differences in productivity and savings rates
Differences in output across economies with the same per capita capital stock can be explained by:
differences in total factor productivity
A production function exhibits decreasing returns to scale when you
double each input - you less than double the output
Suppose k, l, and m grow at constant rates given, respectively, by g bar k, g bar l, and g bar m. What is the growth rate of y = mk^1/3l^2/3
g bar y = g bar m + 1/3g bar k + 2/3g bar t
In 2018, government transfer payments accounted for about ______ of government spending
one-half
The birthplace of modern economic growth was in _______ during the _________ century
the United Kingdom; Mid-eighteenth
Despite the costs associated with economic growth, most people believe that
the benefits far outweigh the costs
If you own your own home, National Accounting uses ______ to measure your home's value
"rental equivalents"
Between 1970 and 1976, Israel's average inflation rate was about 65% per year. With that rate of inflation and according to the rule of 70, prices would double about every _______ years
1.1
Actual GDP is _________ equal to potential GDP.
Rarely
If you have data on per capita GDP and capital per worker, to find total factor productivity you can use the equation A bar = y/k^1/3, if capital's share of GDP is one-third
True
When you cook yourself dinner, you are contributing to economic activity but it is not measured in GDP
True
The relationship between pollution and per capita GDP is documented as
an inverse U.
If the depreciation and saving rates are constant, the economy eventually will reach the steady state in the Slow model because of
diminishing returns to capital in production
Economic growth can be useful in describing why Europeans are
better off in 2015 than they were in 1915 and why Europeans are better off than Thais
The key insight in the Slow model is that
capital accumulation contributes to economic
The production function of the form Y = K^1/3L^1/3 exhibits constant returns to scale
False
When a state builds a new penitentiary, _______ rise(s), but that does not imply that ________ improve(s)
GDP; welfare
Which measure of overall economic activity was NOT available in the 1930's?
Gross domestic product (GDP)
If we define E = $/pound as the dollar/pound exchange rate and NGDPuk as the United Kingdom's nominal GDP; then NGDPuk^us, the United Kingdom's nominal GDP in dollars, is given by
NGDPuk^us = E x NGDPuk
an increase in ____________ leads to a higher steady state level of output per worker, and a decline in the ________ leads to a lower steady-state level of output per worker
productivity; saving rate
If we compress the vertical axis at "key doubling points," we call this the ______ scale
ratio
When we look at the __________ run, we are concerned with the _________.
short; causes of economic fluctuations
If MPL < w, the firm:
should fire some labor until MPL = w
The amount of capital in an economy is a(n) ____________, while the amount of investment is a(n) _________.
stock; flow
The marginal product of labor is defined as:
the additional output generated by hiring an additional unit of labor
In the production function of the standard production model, the productivity parameter enters the equation with an exponent of one, while in the Solow model's equation for the steady-state stock of capital, it is greater than one because
the endogenous level of the capital stock itself depends on productivity
Economic growth is defined as
the percentage change in real per capita income or GDP
The analysis of how an economy approaches the steady state is called
transition dynamics
In the Cobb-Douglas production function Y = K^1/3L^2/3, labor's share of GDP is
two-thirds, regardless of how much labor there is
Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*K*)/Y* = 1/3, respectively. One implication of this result is
w*L* + r*K* = Y*
Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*K*)/Y* = 2/3, respectively. One implication of this result is
w*L* + r*K* > Y*
In the Cobb-Douglas production function Y = A barK^aL^1-a, defining y = Y/L as output per person and k = K/L as capital per person, the per person production function is
y = A bar K^a
In the Slow model, if capital is in the steady state, output
is also in the steady state
The growth rate of any variable y between periods t and t+1 is the ________ and is given by the term ________.
percentage change in that variable; (yt+1-yt)/yt
In the Solow model, the steady-state level of output per worker is a function of
productivity, the depreciation rate, and the saving rate
Which of the following production functions exhibits constant returns to scale
Y = K^aL^1-a
The firm's profit maximization problem is
max profit = F(K,L) - rK - wL {K,L}
Consider table 2.1 Total GDP in 2018 was about _________ billion
$20,580
In 2018, US national output was equal to about
$20.5 trillion
Assume that in Mexico the average annual per capita GDP growth rate if 3 percent per year, while in Argentina it is 2.5 percent. Next, assume that both countries began with an initial per capita GDP of $1,000 in 1965. By 2015, per capita GDP would have been ______ in Mexico and ________ in Argentina
$4,384; $3,437
Assume that in both Mexico and Argentina, the average annual per capita GDP growth rates are 3 percent per year and both countries began with an initial per capita GDP of $1,000. However Argentina has been growing since 1940 but Mexico has only been growing since 1965. In 2015, Mexico's per capita GDP would have been about _________, while Argentina's per capita GDP would have been about ____________.
$4,384; $9,179
The president of the World Bank has asked you to calculate the average population growth rate of Hungary from 1970 to 2010. You know the population was about 10.4 million in 1970 and about 9.5 million in 2010. The average growth rate is about _______ percent.
-0.2
Suppose k grows at a rate of g bar b = 6 percent and l grows at a rate of g bar l = 9 percent. If y = k^1/3l^4/3, then y grows at _______ percent
-10
As an economist working at the IMF, you are given the following data for Burundi: predicted per capita GDP, relative to the US, as given by y = K^1/3, is 0.10, and total factor productivity is 0.083. What is the observed per capita GDP, relative to the US?
0.008
As an economist working at the IMF, you are given the following data for South Africa: predicted per capita GDP, relative to the US, as given by y = K^1/3, is 0.55, and total factor productivity is 0.33. What is the observed per capita GDP, relative to the US?
0.18
As an economist working at the IMF, you are given the following data for Japan: observed per capita GDP, relative to the US, is 0.760; predicted per capita GDP, given by y = k^1/3, is 1.06. What is the total factor productivity?
0.72
Suppose y0 = 100 and assume that k grows at a constant rate of g bar k = 2 percent per year. If yt = kt^1/3, the approximate value of y is ______ in 50 years
139
Suppose x grows at a rate of g bar x = 5 percent and y grows at a rate of g bar y = 12 percent. If z = y*x, then z grows at _______ percent; if z = x/y, z grows at _______ percent
17; -7
In 2018, investment expenditures accounted for about _________ percent of total GDP
18
Since about _________, US expenditure shares by households, firms, and the government have been relatively _________.
1950; constant
In 1960, approximately _______ of the world's population lived on less than $7 per day; by 2017, that fraction _______ to ________ of the population
2/3; fell; less than 10 percent
If the population of Romania was about 20.3 million in 1970 and the average population growth rate was about 0.2 percent, then Romania's population should have been about ______ million in 2010
22.0
Per capita GDP in Japan and the United Kingdom is about _______ US per capita GDP, while in Argentina it is about _______ US per capita GDP, and in Ghana it is only ________.
3/4; 1/3; 1/15
Suppose k grows at a rate of g bar b = 3 percent and l grows at a rate of g bar l = 9 percent. If y = k^1/3l^1/3, then y grows at _____ percent
4
Assume that a production function is given by Y = A bar K^1/3Lbar^2/3. If A bar = 2 and L bar = 1, the depreciation rate is d bar = 0.05, and the savings rate is s bar = 0.1, then the steady state level of capital is about
8.0
The costs of economic growth include which of the following?
All of these answers are correct - pollution and the depletion of natural resources - global warming - increased income inequality -technological advances, which may lead to the loss of specific jobs and industries
Which of the following is/are the benefit(s) of economic growth?
All of these answers are correct: - increases in life expectancy - reduction in infant mortality - higher incomes - an expansion in the range of goods and services available
For which of the following does the Solow model NOT provide an adequate explanation?
All of these answers are correct: - why saving rates differ across countries - the cause of productivity differences across countries - why population growth rates differ across countries - what causes long-term economic growth
According to the income approach to GDP, the largest portion of GDP is net operating surplus
False
An economic model is an exact replica of the economy
False
The Solow Model of economic growth endogenizes the savings rate
False
If the marginal product of capital is less than the rental rate of capital, the firm should rent more capital
False --> A firm should only rent more capital if the MPK is greater than the rental rate of capital
With a Cobb-Douglas production function Y = K^1/3L^2/3, the marginal product of capital is _______ and the marginal product of labor is ______________.
MPK = (1/3)(Y/K); MPL = (2/3)(Y/L)
If we want to calculate the Mexican real GDP in US dollars but adjusted for prices, which of the following would we use?
Real GDPmex^us prices = (price level US/price level mex) x Normal GDP mex
Which of the following production functions exhibits constant returns to scale?
Their exponents add up to 1
If per capita GDP in 2018 was $900, in 2019 was $1,000, and in 2020 was $1,200, the growth rate of per capita GDP between 2018 and 2020 was
about 33 percent
In a Cobb-Douglas production function, the factor share of income going to each input is equal to the exponent on the input in the production function
True
If the production function if given by Y = K^1/3L^2/3 and K = 27 and L = 8, total output equals
Y = 12
Among the world as a whole, there is __________ correlation between how rich a country is and how fast it ___________ from 1960 to 2010
almost no; grew
The law of diminishing marginal product to capital means that as we add additional units of capital
but hold labor constant, output will increase, but at a decreasing rate
One of the key characteristics of the Cobb-Douglas production function is:
constant returns to scale
An implication of the Slow model is that once an economy reaches the steady state, per capita
consumption will be constant
The endogenous variables in the Slow model are
consumption, investment, the capital stock, labor, and output
During the 1940s, ________ increased sharply as a percentage of U.S. GDP because of _________.
government expenditure; World War II
Suppose k and l grow at constant rates given, respectively, by g bar k and g bar l. What is the growth rate of y if y = k^a / l^(1-a), a>0
gy = ag bar k - (1-a) g bar l
Assuming the current rate of economic growth continues, the average parent of a college student will have a lifetime income _______________ that too his or her child
half
In the past 60 years or so, labor's share of GDP in the United States
has been roughly 2/3
Consider two economies. If each country has the same production function and the same amount of capital and labor, the country that ___________ produces more
is more productive
In the Slow model, saving and investing in additional factories and computers do __________ output to grow in the _________ run if the economy is below Y*. However, in the long run, the __________ returns to capital accumulation will lead the return to these investments to fall
lead; medium; diminishing
When we look at the ________ run, we are concerned with __________.
long; the causes of economic growth