ECON 4020 Midterm 1: Quiz Questions

A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is

150,000

If population and GDP are growing at the same rates, then per capita GDP does not grow.

true

If real GDP increases by 2 percent and nominal GDP increases by 4 percent, then inflation is approximately 2 percent.

true

When comparing GDP across countries, it is better to use comparisons based on common prices than simply on exchange rate conversions.

true

The growth rate of any variable y between periods t and t + 1 is the ________ .

The percentage change in that variable

You plot the production function for the United States on a graph with output per person on the vertical axis and capital per person on the horizontal axis. If a shock occurs causing the productivity parameter to increase, the production function would shift upward.

True; A higher productivity parameter implies that U.S. production (output per person) is higher for any given level of capital per person.

Which of the following counts as investment?

You buy a new house. ( Investment includes purchases of structures and equipment by businesses in addition to purchases of new homes. A computer for home counts as consumption.)

The United States and Chile have both grown at about 2 percent per year for the last 40 years. By the principle of transition dynamics, what does this imply?

both countries are near their steady states

According to the Solow model two countries will grow at different rates if

both have different steady-state level of output and the same capital stock below the steady-state level

The key insight in the Solow model is that:

capital accumulation contributes to economic growth.

One of the key characteristics of the Cobb-Douglas production function is:

constant returns to scale

If an economy has a higher investment rate and a higher depreciation rate, the economy will always have a higher level of output.

false

In the last three hundred years, the standards of living between the richest and poorest countries have converged.

false

When the trade balance is negative, domestic producers are exporting more goods than are being imported.

false

What is an explanation for why an economy eventually settles in steady state?

Diminishing returns implies the slope of the investment curve becomes smaller, while depreciation remains constant. At the intersection of the two curves, net investment is zero.

If a variable is growing at a positive constant rate, when plotted on a ratio scale, the slope of the plot will be becoming steeper over time.

False; it will be a straight line.

what is the marginal product of capital for a cobb douglas production function?

proportional to the average amount produced by each unit of capital where the factor of proportionality is equal to the exponent on capit

If MPL < w, the firm:

should fire some labor until MPL = w.

If net investment is negative

the economy is above its steady state and growth of output is negative

Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes

the growth rate of output to fall temporarily and the level of GDP to fall permanently

An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause

the growth rate of output to rise initially as the economy begins to converge to the old steady state.

What is included in TFP?

things not in mathematical model: ex would be quality of labor

In the Solow diagram, an increase in the investment rate will cause a decrease in consumption for all levels of capital.

true

What does A hat equal

productivity parameter

When comparing shares of consumption in GDP it is best to use ( ___ ) variables. When comparing real rates of economic growth it is best to use ( ___ ) variables.

nominal; chain-weighted

In a simple model of supply and demand the equation for the demand curve is given by Q = 20 - 10P and the equation for the supply curve is given by Q = 5 + 5P. P and Q are:

endogenous variables

If Y = AK1/3L2/3 and A grows at a rate of 1 percent per year, K grows at a rate of negative 3 percent per year and L grows at a rate of 3 percent per year, then the growth rate of Y is

2 percent. The growth rate formula for such a production function is g(Yt) = g(At) + (1/3)*g(Kt) + (2/3)*g(Lt). The first two terms cancel and we are left with (2/3)*(3).

Output per person is higher when

A country has higher per capita output if capital per person and the productivity parameter are higher. The productivity parameter is higher under better institutions and when technologies are adopted more efficiently.

______ are inputs to the model and generally are fixed over time, while ________ are the outcomes of the model.

Exogenous variables; endogenous variables

Which of the following is NOT an example of capital?

Screws and bolts used for making cars at an automobile factory. They are intermediate goods

According to the principle of transition dynamics, which economy will grow fastest?

The same country 1 year after the natural disaster destroyed most of the capital stock

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; Regardless of the amount of capital or labor in an economy, the exponents in the production function determine the factor shares.

The difference between a parameter and an exogenous variable is that

a parameter is fixed over time, while an exogenous variable is allowed to change over time.

A firm uses capital and labor to produce a good. Which of the following is greatest?

accounting profit

The three main variables we discuss in the short run are

economic fluctuations, inflation, and unemployment.

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

In the Solow model, the investment rate in a particular economy is a function of the amount of output (income) an economy generates each year.

false; it does not change over time

The solow model is a static model and thus can only tell us the levels of our endogenous variables in steady state.

false; it is a dynamic model

If the productivity parameter is assumed to equal 1, the production model

implies that more capital implies more output per person but incorrectly overestimates the value of per capita output.

Under national income accounting, GDP equals:

the goods produced in the economy, the income earned, the total purchases

Imagine a two-good economy where the quantity of the goods produced is unchanged over time, but where prices have increased. Then, in the most recent year, real GDP will be

the largest number when using the Paasche index.

Suppose we compare GDP per person in Uganda and the United States in two ways: first using the exchange rate method and second using the relative price-based conversion as well (PPP). Then, Uganda appears to be richer under the relative price-based conversion (PPP) than with the exchange rate conversion.

true

Total factor productivity explains a larger amount of the difference in income per capita in the Solow model than in the production model.

true

Until 1970, labor's share of GDP has been relatively stable at approximately two-thirds of GDP.

true

the change in capital stock is a flow variable

true