EC Test 1

The analysis of how an economy approaches the steady state is called:

transition dynamics

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

true

Differences in output across economies with the same per capita capital stock can be explained by:

differences in total factor productivity

The influences of institutions on economic performance can be easily contrasted using

north and south korea

the "bar" over the A means that it is a:

parameter that is fixed and exogenous

In the Solow model, the steady-state capital stock is a function of

productivity, the depreciation rate, the labor stock, and the saving rate.

In the Solow model, if, in the absence of any shocks, the capital stock remains at K* forever, this rest point is called the:

steady state

The amount of capital in an economy is a(n) ________, while the amount of investment is a(n) ________.

stock; flow

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.

Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the percentage change in real GDP in chained prices, benchmarked to 2015 is:

-16.5% Real GDP 2014 using 2014 prices = 2,000x6 + 10x1,000=22,000Real GDP 2015 using 2014 prices = 1,000x6 + 12x1,000=18,000Percentage change = (18,000-22,000)/22,000= -18%Real GDP 2014 using 2015 prices = 2,000x5 + 10x1,000=20,000Real GDP 2015 using 2015 prices = 1,000x5 + 12x1,000=17,000Percentage change = (17,000-20,000)/20,000= -15%Percentage change in real GDP in chained prices, benchmarked to 2015 is the average of the two growth rates = (-18 -15)/2 = - 16.5%

This year a real estate agent helped you buy a house for $200,000, which was originally built in 1985. The agent's commission was $12,000. How will this transaction affect this year's GDP?

Consumption expenditures will increase by $12,000.

Imagine increases in the parameters of the Solow model that are all identical in magnitude. Which one of the following parameters will result in the largest increase in steady-state output?

The productivity parameter

The depreciation of fixed capital is a part of Gross Domestic Product but not part of Net Domestic Product.

True

Which of the following questions does the Solow model NOT help to explain?

Why do countries sustain growth in the long run?

Which of the following counts as investment?

You buy a house (not stock)

Output per person is higher when

a country is more efficient in adopting a technology. b. a country has a higher capital-to-population ratio. c. a country has stronger property rights and contract enforcement. All of these choices are correct!

the relationship between pollution and per capita GDP is documented as:

an inverse u

The marginal product of the labor curve represents the

demand for labor

In the Solow 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 saving rates

If the depreciation and saving rates are constant, the economy eventually will reach the steady state in the Solow model because of:

diminishing returns to capital in production

Using the expenditure approach, consumption expenditures include household purchases of:

durable and nondurable goods and services.

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

Which of the following inputs do we generally consider in a simple production function

capital

A central lesson of the Solow model is that:

capital accumulation cannot serve as the engine of long-run per capita economic growth.

The key insight in the Solow model is that

capital accumulation contributes to economic growth.

The solution to the firm's maximization problem is how much:

capital and labor to hire, given the rental rate of capital and labor's wage rate.

In the Solow model, it is assumed a(n) ________ fraction of capital depreciates each period

constant

In the Solow model, it is assumed that a(n) ________ fraction of capital depreciates regardless of the capital stock.

constant

the Solow model assumes the saving rate is:

constant

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

constant RTS

In 2018, the largest share of GDP was

consumption

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

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

All else equal, a higher rate of depreciation, increases the capital stock.

false

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

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

false

The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person.

false

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

false

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

false TRADE BALANCE IS NET EXPORTS

Capital per person explains about one-half of the difference in per capita income between the richest and poorest countries.

false its actually 1/4 to 1/3

The solution to the firm's profit maximization is:

MPL = w and MPK = r.

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 output but not in output per person

Which of the following is included in TFP

quality of labor

If MPL < w, the firm:

should fire some labor until MPL = w.

If MPK > r, the firm:

should hire more capital until MPK = r

In the Solow model, the parameter d denotes ________ and is ________.

the depreciation rate; less than one

In the Solow model, with population growth

the economy eventually settles down to a steady state in output per person

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

If the marginal product of capital is more than the rental rate of capital, the firm should rent more capital.

true

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

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

true

In the long run, the real interest rate is equal to the marginal product of capital.

true

both the United States and France, among the richest countries in the world, have similar levels of education and capital per worker, but U.S. citizens enjoy higher incomes than the French. One explanation might be differences in:

institutions

In the Solow model, net investment is defined as:

investment minus capital depreciation

In the Solow model, if capital is in the steady state, output:

is also in the steady state.

the level of consumption:

is largest when the economy is above its steady state

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 Solow model, the ________ plays a ________ role than it does in the standard production function model.

productivity parameter; large

In the Solow model, the steady-state level of output per worker is a function of

productivity, the depreciation rate, and the saving rate

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

Output per capita and output per worker are

equal in the production model, but output per capita is smaller in general.

By how much does the current GDP rise in the following scenario? A real estate agent sells a house for $250,000 that the previous owners had purchased 10 years earlier for $90,000. The real estate agent earns a commission of $10,000.

$10,000

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

$150,000 REV-INTERMEDIATE GOODS (NOT LABOR) 200,000-50,000

Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information, and using the percentage change in real GDP in chained prices, benchmarked to 2015, the inflation rate is approximately:

-6.2%

Which of the following would increase the U.S. GDP?

-The U.S. government purchases a tank from a U.S. company (GOV PURCHASE) -The U.S. government increases funding for tax policy at a U.S. university.

The steady state is defined as the point where capital accumulation, Δ K t, is equal to:

0

The era of modern economic growth began about:

250 years ago

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 at their steady states

Suppose you are given the data for Brazil and Portugal. In Brazil, the saving rate is 0.1 and the depreciation rate is 0.1, while in Portugal the saving rate is 0.2 and the depreciation rate is 0.1. Using the Solow model, you conclude that in the steady state:

Portugal has a higher capital-output ratio than Brazil

Which of the following is NOT an example of capital?

Screws and bolts used for making cars at an automobile factory (BC THEY ARE USED UP-CAPITAL DEPRECIATES OVER TIME)

Which of the following would not increase the U.S. GDP?

The U.S. government increases social security payments

the birthplace of modern economic growth was in ________ during the ________ century.

The UK, mid 18th

he lack of a "bar" over the L means that it is:

an endogenous variable

Mathematically, an economic model is:

a set of equations

Under national income accounting, GDP equals

a.the number of the goods produced in the economy. b. the income earned in the economy. c. the total purchases in the economy. ALL OF THE ABOVE

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

a. The production function exhibits diminishing returns to capital. b. The capital stock depreciates at a constant rate. c. Eventually, investment generated is equal to the amount of capital depreciated. All of these choices are correct.

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

a. correctly identifies that countries are richer if they have more capital. b. incorrectly predicts that poor countries are substantially richer than they are. c. incorrectly predicts that some rich countries are marginally poorer than they really are. All of these choices are correct!

Which of the following is an exogenous variable in the Solow model?

a. productivity b. the depreciation rate c. the saving rate d. the initial capital stock All of these answers are correct.

Which of the following is/are essential for economic success

a. property rights b. the rule of law c. contract enforcement d. the separation of powers All of these answers are correct.

Which of the following is/are NOT included in the expenditure approach to national income accounting?

a. transfer payments b. taxes c. Social Security d. changes in stock prices ALL OF THE ABOVE

If depreciation exceeds new investment, the capital stock in the economy is

above its steady-state level

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

in models with perfect competition

economic profits are zero

The Solow model of economic growth:

endogenizes capital

When price equals marginal cost, economic profits are positive.

false, THIS IS WHEN PROFITS=0

Immediately following the increase in the saving rate, output grows rapidly. As the economy approaches its new steady state, the growth rate

gradually declines

In the Solow model, if investment is ________ depreciation, the capital stock ________.

greater than; grows

In the Solow model, if I>dK, the capital stock:

grows

According to the Solow model, in the steady state, countries with high saving rates should have a:

high capital-output ratio

One reason for the larger trade deficit in the last several decades is:

increased consumption

In the Solow model, in every period, a fraction of total output ________, which ________ next period's capital stock.

is saved; adds to

In the simple Solow model, we assume

labor is exogenous

In the Solow model, saving and investing in additional factories and computers does ________ output to grow in the ________ run if the economy is below Y*. But, in the long run, the ________ returns to capital accumulation lead the return to these investments to fall.

lead; medium; diminishing

An implication of the Solow model is that once an economy reaches the steady state:

long-term growth does not continue

A model is a(n) ________ representation of ________ world that we use to study economic phenomena

mathematical; a toy

In the Solow model, if a country's saving rate increases, the country:

moves from a relatively low steady state to one that is higher.

In the standard production model's production function, 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

The principle of transition dynamics can be summarized as:

the further below its steady state an economy is, the faster the economy will grow

Which of the following do(es) NOT explain differences in total factor productivity?

the labor stock

If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates are unchanged, the Solow model predicts that the economy will grow and eventually reach:

the same steady-state level of output as it would have before the disaster

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

the saving rate; initial capital stock

An increase in ________ leads to a higher steady-state capital stock, and a decline in ________ leads to a lower steady-state capital stock.

the saving rate; productivity

An increase in ________ leads to a higher steady-state level of output, and an increase in ________ leads to a lower steady-state level of output.

the saving rate; the depreciation rate

The change in the capital stock is a flow variable

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

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

per capita GDP can grow at a negative rate.

true

the behavior of Germany's per capita income after World War II is an example of convergence

true