ECON Exam 2 Review

In the two-sector model presented in Section 9-4, where the sectors consist of manufacturing firms and research universities:

only firms use capital as inputs. As described in Section 9-4, in the two-sector model firms use knowledge and capital while universities only use knowledge.

In the basic endogenous growth model, the production function exhibits:

constant returns.The basic endogenous growth model production function Y=AK exhibits constant returns to scale. See Section 9-3.

The Golden Rule level of capital accumulation is defined as the level of the capital stock that achieves a steady state with the:

highest levels of consumption;

An economy starts off in a steady state with less capital than at the Golden Rule level. Now the saving rate changes to the level that will achieve the Golden Rule. What is the path of consumption during the transition to the Golden Rule steady state?

It is lower, then higher than in the initial steady state. The saving rate must rise to achieve the Golden Rule. This will reduce consumption immediately, but will raise it in the long run. See Figure 8.10 in Section 8-2.

An economy is in a steady state with capital higher than the Golden Rule level. Now the saving rate falls to a level that will achieve the Golden Rule capital stock in the long run. What will happen to the level of consumption between the initial and new steady states?

It will rise instantly and then will fall gradually.the level of consumption rises instantly and then falls gradually until it reaches its Golden Rule level.

The solos growth model assumes that the production function exhibits

a constant returns to scale

n most endogenous growth theories, externalities from firms' research play a crucial role. Economists agree that research:

can exhibit externalities of ambiguous value. As described in Section 9-4, research can have the positive "standing on shoulders" externality or the negative "stepping on toes" externality. Note, however, that empirical studies indicate that the externalities of research are overwhelmingly positive.

At the Golden Rule level of capital accumulation, the marginal product of capital equals the:

depreciation rate ;

In the basic endogenous growth model, usually called the Y=AK model, as long as the saving rate times the constant A is greater the rate of depreciation, income will grow:

forever;Unlike the Solow model, in the Y=AK model the economy's income can increase indefinitely, even without technological progress. See Section 9-4.

in the solow growth model, depreciation rate represents the:

fraction of capital stock that wears out each year

In the Solow growth model with population growth (n) and technological progress (g), the steady-state growth rate of output per worker is:

g. As explained in Section 9-1, the steady state growth rate of output per worker is g.

Which of the following is NOT an explanation for variations in the Solow residual?

growth in the capital stock. Since the Solow residual measures growth in output NET of growth in factors, changes in the capital stock do not affect it. See Appendix to Chapter 9.

Advocates of the Y=AK model interpret capital as:

including knowledge. While constant returns to capital are clearly implausible for the conventional definition of capital, they become more plausible if knowledge is considered to be capital as well. See Section 9-4.

the change in the capital stock is equal to:

investment-depreciation

if the capital stock is above the steady state level, then investment:

is smaller than depreciation. Since capital stock is above the steady state level, it must be falling, this occurs when investment is higher than depreciation.

In the Solow model with technological progress, an increase in the rate of technological change will:

leave the investment curve unchanged. Since technological progress does not affect the "effective worker" production function or the saving rate, the investment curve will remain the same. See Section 9-1

If two economies are identical except for their rates of population growth, then the economy with the higher rate of population growth will have:

lower steady-state output per worker. As discussed in Section 8-3, an economy with a higher rate of population growth will have lower steady-state levels of capital, output, and consumption per worker.

In the Solow growth model with population growth of 5 percent and a labor augmenting technological progress of 3 percent, the economy's:

number of workers grow at 5 percent while the number of effective workers grow at 8 percent. As explained in Section 9-1, the growth rate of the number of effective workers is the population growth rate plus the rate of labor augmenting technological progress.

what is not assumed by the solos growth model?

output is constant

In the two-sector model, the proportion of labor devoted to research universities determines the:

steady-state growth rate of income. A key result of the two-sector model is that the steady-state growth rate of income is determined by the proportion of labor devoted to universities. See Section 9-4.

In the Solow model, increased saving leads to _______ growth, but in the Y=AK model, increased saving can lead to _______ growth.

temporary; persistent. Unlike the Solow model, increased saving in the Y=AK model can lead to never-ending growth. See Section 9-4.

The steady state level of income per person in a country is a function of all the following EXCEPT:

the current level of income in the country. The current level of income does not tell us what the steady-state level of income will be in the long run. Conditional on the steady state, countries with lower initial income will grow more rapidly. See Section 9-2

In the Solow growth model with population growth (n) and technological progress (g), the steady-state growth rate of output per effective worker is:

0. As explained in Section 9-1, the steady state growth rate of output per effective worker is 0.

Using the framework of the Solow growth model, the U.S. level of capital is presently:

below the Golden Rule level. As demonstrated in section 9-3, the Solow model suggests that the current U.S. saving rate is too low to achieve the Golden Rule steady-state level of capital.

The Kremerian model on population growth:

contradicts Thomas Malthus' claim that higher population growth rate causes poverty. The model suggests that world population growth is a key driver of advancing economic prosperity.The Kremerian model suggests that world population growth is a key driver of advancing economic prosperity. See Section 8-3.

The marginal product of capital (MPK) is 1/3; the marginal product of labor (MPL) is 3. Capital is increased by 30; the labor force is increased by 10. How much does output increase?

40. The increase in output is equal to the change in capital multiplied by the MPK plus the change in labor multiplied by the MPL. See the appendix to Chapter 9.

In the Solow growth model with population growth (n) and technological progress (g), the steady-state growth rate of total output is:

As explained in Section 9-1, the steady-state growth rate of total output is n + g

If an economy is initially in a steady state and it experiences an increase in its saving rate, then the steady-state capital stock will:

If the saving rate rises, the steady-state level of the capital stock will also rise. See Section 8-1.

Real-business-cycle theorists believe that fluctuations in output and employment are:

driven by technological shocks. Real-business-cycle theorists believe that markets clear quickly and that the economy is always at its natural rate. See Appendix to Chapter 9.

If two economies are identical except for their rates of population growth, then if both economies are in steady state, the economy with the higher rate of population growth will have a:

higher rate of growth of total output. Both economies have constant levels of output per person in the steady state. However, the growth rate of total output in each economy depends on the rate of population growth. This means that total output in the economy with the higher rate of population growth will grow faster. See Section 8-3.

In a recession, firms may keep workers they do not need, so they will have these workers when the recession is over. This is called:

labor hoarding

If the population growth rate decreases in an economy described by the Solow growth model, the line representing population growth and depreciation will:

pivot clockwise.Decreasing the rate of population growth shifts the line downward. See Figure 8.12 in Section 8-3.

A permanent change in the growth rate of total output can arise from a change in the:

rate of technological progress. The steady-state growth rate of total output is equal to the rate of population growth (n) plus the rate of technological progress (g). A change in the rate of technological progress will permanently change the growth rate of total output. See Section 9-1.

All of the following are possible explanations for the worldwide slowdown in economic growth during the 1970s and 1980s EXCEPT:

scarcity of non-petroleum raw materialsThe world economy has not experienced an overall shortage of raw materials during the last twenty-five years. Indeed, even the oil shortages of the 1970s seem to be a thing of the past. See Section 9-3.

A war has wrecked the economy of Baloneya: both the capital stock and the work force have been reduced by 50 percent. If the economy's production function has constant returns to scale, how will the postwar level of output per worker compare to the prewar level?

stay the same; Output per worker depends only on the level of capital per worker. Since capital per worker does not change in this case, neither does the level of output per worker. See Section 8-1.

In the Solow growth model with population growth and technological progress, the economy experiences a 5 percent "labor-augmenting technological progress" if:

the economy grows by 5% while the population stays the same. As explained in Section 9-1, labor-augmenting technological progress occurs when output increases as if the labor force had increased by 5 percent more than it really did.

In the Solow growth model with population growth, the Golden Rule steady state is achieved when the marginal product of capital equals:

the population growth rate plus the rate of depreciation.As explained in Section 8.3, at the Golden Rule steady state the marginal product of capital net of depreciation equals the rate of population growth.

In a Solow model with population growth and technological progress, the steady-state level of consumption is maximized when the steady state marginal product of capital equals the rate of depreciation plus:

the rate of population growth plus the rate of technological change.

Suppose that an economy is in steady state and has more capital than it would have in the Golden Rule steady state. A policymaker would want to pursue policies aimed at decreasing:

the rate of saving;Reducing the saving rate will reduce the level of capital in the steady state. See Section 8-2.