MIDTERM 3 - practice problems

If the U.S. production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4 percent per year, and the capital-output ratio is 2.5, the saving rate that is consistent with steady-state growth is: A) 17.5 percent. B) 14 percent. C) 20 percent. D) 12.5 percent.

A) 17.5 percent.

If the natural rate of unemployment is 12.5% and the job finding rate is 56%, then the job separation rate must be A) 8% B) 12.5% C) 22% D) 43.5%

A) 8%

Suppose output per worker is y=k^(0.5), the saving rate is 30%, and the depreciation rate is 10%. If the amount of capital per worker is currently 8, what will it be next period? A) 8.05 B) 8.08 C) 8.13 D) 8.15

A) 8.05

Suppose economies A and B are identical, except A starts with less capital than B. Which economy will grow faster? A) A B) B C) neither

A) A

What would NOT help to explain the trend of a lower natural rate in the U.S. from the late 1980s to the early 2000s? A) Higher real minimum wage B) Lower union membership C) Less volatile oil prices D) Aging of the Baby Boomers

A) Higher real minimum wage

If Y is output, K is capital, u is the fraction of the labor force in universities, L is labor, and E is the stock of knowledge, and the production Y = F(K,(1 - u) EL) exhibits constant returns to scale, then output (Y) will double if: A) K and E are doubled. B) L is doubled. C) K and u are doubled. D) K is doubled.

A) K and E are doubled.

Labor hoarding refers to: A) continuing to employ workers during a recession to ensure they will be available in the recovery. B) using less capital in production so that more workers will have jobs. C) contractually preventing workers from obtaining jobs with competing firms. D) keeping workers in low-wage jobs in order to reduce labor costs.

A) continuing to employ workers during a recession to ensure they will be available in the recovery.

In the Solow growth model with population growth and technological change, the break-even level of investment must cover: A) depreciating capital, capital for new workers, and capital for new effective workers. B) depreciating capital and capital for new workers. C) depreciating capital and capital for new effective workers. D) depreciating capital.

A) depreciating capital, capital for new workers, and capital for new effective workers.

The preponderance of empirical evidence supports the hypothesis that economies that are open to trade _____ than comparable closed economies. A) grow more rapidly. B) converge more slowly to a steady-state equilibrium. C) have lower steady-state levels of income per worker due to foreign competition. D) have faster rates of population growth and technological progress.

A) grow more rapidly.

If the production function exhibits decreasing returns to scale in the steady state, an increase in the rate of population would lead to: A) growth in total output but a decrease in output per worker. B) no growth in total output or in output per worker. C) growth in total output and growth in output per worker. D) growth in total output but no growth in output per worker.

A) growth in total output but a decrease in output per worker.

If the steady-state capital stock is currently below the golden rule level, this means that the marginal product of capital is too ---- and the saving rate should be ----. A) high; raised B) high; lowered C) low; raised D) low; lowered

A) high; raised

If the per-worker production function is y = Ak, where A is a positive constant, in the steady state, a: A) higher saving rate leads to a higher growth rate. B) higher saving rate does not affect the growth rate. C) lower saving rate does not affect the growth rate. D) lower saving rate leads to a higher growth rate.

A) higher saving rate leads to a higher growth rate.

If a larger share of national output is devoted to investment, starting from an initial steady-state capital stock below the Golden Rule level, then productivity growth will: A) increase in the short run but not in the long run. B) not increase in either the short run or the long run. C) increase in both the short run and the long run. D) increase in the long run but not in the short run.

A) increase in the short run but not in the long run.

In the Solow growth model, increases in capital ______ output and ______ the amount of output used to replace depreciating capital. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

A) increase; increase

If the saving rate increases, then the steady-state capital stock A) increases. B) decreases. C) remains the same.

A) increases.

Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker: A) more in Lowland. B) more in Highland. C) by the same amount in Highland and Lowland. D) in Highland, but not in Lowland.

A) more in Lowland.

In a steady state: A) the number of people finding jobs equals the number of people losing jobs. B) no hiring or firings are occurring. C) the number of people finding jobs exceeds the number of people losing jobs. D) the number of people losing jobs exceeds the number of people finding jobs.

A) the number of people finding jobs equals the number of people losing jobs.

Assume that a war reduces a country's labor force but does not directly affect its capital stock. Then the immediate impact will be that: A) total output will fall, but output per worker will rise. B) both total output and output per worker will rise. C) both total output and output per worker will fall. D) total output will rise, but output per worker will fall.

A) total output will fall, but output per worker will rise.

In the Solow model with technological progress, the steady-state growth rate of output per effective worker is: A) n + g. B) 0. C) g. D) n.

B) 0.

Suppose the production function is y=100k^(0.3), the depreciation rate is 5%, the population growth rate is 2%, the rate of labor-augmenting technological progress is 3%, and the saving rate is 30%. What is the steady-state capital stock per worker? A) 2867 B) 3457 C) 4755 D) 5260

B) 3457

Which grows at the rate of labor-augmenting technological progress on a balanced growth path? A) Output B) Output per worker C) Output per effective worker

B) Output per worker

Suppose an economy has a population growth rate of 2%, a labor-augmenting technology growth rate of 1.5%, and a net return on capital of 3%. To achieve the golden rule, this economy should save at: A) a higher rate. B) a lower rate. C) the current rate.

B) a lower rate.

Consistent with the data, the Solow model shows that there is ---- correlation between the population growth rate and real GDP per worker. A) a positive B) a negative C) zero

B) a negative

In the Solow growth model with population growth, but no technological progress, the steady-state amount of investment can be thought of as a break-even amount of investment because the quantity of investment just equals the amount of: A) output needed to achieve the maximum level of consumption per worker. B) capital needed to replace depreciated capital and to equip new workers. C) output needed to make the capital per worker ratio equal to the marginal product of capital. D) saving needed to achieve the maximum level of output per worker.

B) capital needed to replace depreciated capital and to equip new workers.

All of the following are reasons for frictional unemployment except: A) workers have different preferences and abilities. B) the flow of information is imperfect. C) geographic mobility takes time. D) unemployment workers accept the first job offer that they receive.

D) unemployment workers accept the first job offer that they receive.

In a steady-state economy with population growth n and labor-augmenting technological progress g, persistent increases in standards of living are possible because the: A) saving rate constantly increases. B) capital stock grows faster than does the labor force. C) capital stock grows faster than does the number of effective workers. D) rate of depreciation constantly decreases.

B) capital stock grows faster than does the labor force.

Suppose country A has a higher population growth rate than country B. All else equal, steady-state output per worker is: A) higher in A. B) higher in B. C) the same in both countries.

B) higher in B.

If an economy is in a steady state with no population growth or technological change and the capital stock is below the Golden Rule: A) a policymaker should definitely take all possible steps to increase the saving rate. B) if the saving rate is increased, output per capita will rise and consumption per capita will first decline and then rise above its initial level. C) if the saving rate is increased, output and consumption per capita will both rise, both in the short and long runs. D) if the saving rate is increased, output per capita will at first decline and then rise above its initial level, and consumption per capita will rise both in the short and long runs.

B) if the saving rate is increased, output per capita will rise and consumption per capita will first decline and then rise above its initial level.

Changes that can increase measured total factor productivity include: A) increases in the capital-labor ratio. B) increased expenditures on education. C) regulations requiring increases in worker safety. D) regulations requiring reductions in pollution.

B) increased expenditures on education.

Which of the following changes would bring the U.S. capital stock, currently below the Golden Rule level, closer to the steady-state, consumption-maximizing level? A) increasing the population growth rate. B) increasing the saving rate. C) increasing the rate of capital depreciation. D) increasing the rate of technological progress.

B) increasing the saving rate.

Consider factor prices in the Solow model with technological progress. In a steady state (a balanced growth path), the real wage is ---- and the real rental rate of capital is ----. A) increasing; increasing B) increasing; constant C) constant; increasing D) constant; constant

B) increasing, constant

If an economy is in a steady state with no population growth or technological change and the capital stock is above the Golden Rule level and the saving rate falls: A) output and investment will decrease, and consumption and depreciation will increase and then decrease but finally approach levels above their initial state. B) output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state. C) output and investment will decrease, and D) consumption and depreciation will increase. output, consumption, investment, and depreciation will all decrease.

B) output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.

Unemployment insurance increases the amount of frictional unemployment by: A) inducing workers to accept the first job offer that they receive. B) softening the economic hardship of unemployment. C) making workers more frantic in their search for new jobs. D) making employers more reluctant to lay off workers.

B) softening the economic hardship of unemployment.

Public policies in the United States designed to stimulate technological progress do not include: A) subsidies given by the National Science Foundation. B) tax breaks to encourage homeownership. C) tax breaks for research and development. D) the temporary monopoly granted by the patent system.

B) tax breaks to encourage homeownership.

Endogenous growth theory rejects the assumption of exogenous: A) production functions. B) technological change. C) population growth rates. D) rates of depreciation.

B) technological change.

If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock: A) will be at a lower level than in the steady state of the high capital economy. B) will be at the same level as in the steady state of the high capital economy. C) will be proportional to the ratio of the capital stocks in the two economies. D) will be at a higher level than in the steady state of the high capital economy.

B) will be at the same level as in the steady state of the high capital economy.

If the job separation rate is 1% and the job finding rate is 9%, then the natural rate of unemployment is: A) 1%. B) 9%. C) 10%. D) 11%.

C) 10%.

Suppose output per worker is given by the square root of the capital stock. If steady-state capital per worker is 9 and the saving rate is 30%, what is steady-state consumption per worker? A) 0.9 B) 1.2 C) 2.1 D) 2.5

C) 2.1

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is: A) 9. B) 1. C) 4. D) 2.

C) 4.

Suppose the production function is y=100k^(0.3) and the depreciation rate is 8%. What is the golden rule capital stock? A) 2857 B) 3554 C) 4755 D) 5260

C) 4755

If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then the number of effective workers is growing at a rate of: A) 2 percent. B) 6 percent. C) 5 percent. D) 3 percent.

C) 5 percent.

Among the four countries—the United States, the United Kingdom, Germany, and Japan—the one that experienced the most rapid growth rate of output per person between 1948 and 1972 was: A) The United States. B) The United Kingdom. C) Japan. D) Germany.

C) Japan.

Empirical results justify substantial government subsidies to research based on the finding that the: A) the private return to research is approximately equal to the social return to research. B) the private return to research is positive, but the social return to research is negative. C) the private return to research is greater than the social return to research. D) the private return to research is less than the social return to research.

D) the private return to research is less than the social return to research.

Which of the following is an example of structural unemployment? A) Tim is looking for a job with flexible hours but has not been offered one yet. B) Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer-generated animation. C) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available. D) Fatima lost her job at a packing plant but has not looked very intensively for a new job because she still has 2 months of unemployment insurance benefits left.

C) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.

In the Solow model, what drives sustained increases in the standard of living? A) Population growth B) Saving rate C) Technological progress D) Capital accumulation

C) Technological process

According to the Solow growth model, high population growth rates: A) are not a factor in determining living standards. B) are a prerequisite for technological advances and higher living standards. C) force the capital stock to be spread thinly, thereby reducing living standards. D) place great strains on an economy's productive resources, resulting in perpetual poverty.

C) force the capital stock to be spread thinly, thereby reducing living standards.

Suppose two economies are identical except for different saving rates. In a steady state, the economy with a lower saving rate will have ---- output per worker and ---- consumption per worker. A) lower; lower B) lower; higher C) lower; lower, higher, or the same D) higher; lower, higher, or the same

C) lower; lower, higher, or the same

The unemployment rate in the United States since 1972 has: A) equaled the natural rate of unemployment in every year. B) remained constant from year to year. C) never been close to zero. D) gravitated toward a steady-state rate of zero.

C) never been close to zero.

A possible externality associated with the process of accumulating new capital is that: A) old capital may be made more productive. B) a reduction in labor productivity may occur. C) new production processes may be devised. D) the government may need to adopt an industrial policy.

C) new production processes may be devised.

Which of the following increases frictional, rather than structural, unemployment? A) minimum wage B)efficiency wages C) unemployment insurance D) unions

C) unemployment insurance

Workers unemployed as a result of wage rigidity are: A) actively searching for a job to match their skills. B) not eligible to receive unemployment insurance benefits. C) waiting for a job to become available. D) relocating to another part of the country as a result of sectoral shifts.

C) waiting for a job to become available.

If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate: A) will be at the same level as in the steady state of the high-saving economy. B) will grow at a slower rate than in the high-saving economy. C) will be at a lower level than in the steady state of the high-saving economy. D) will be at a higher level than in the steady state of the high-saving economy.

C) will be at a lower level than in the steady state of the high-saving economy.

Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3 percent, and labor growing at 1 percent. The capital share is 0.3. The growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are: A) 0 percent, 1 percent, and 2 percent, respectively. B) 1.8 percent, 0.3 percent, and 0.9 percent, respectively. C) 0.3 percent, 0.7 percent, and 2 percent, respectively. D) 0.9 percent, 0.7 percent, and 1.4 percent, respectively.

D) 0.9 percent, 0.7 percent, and 1.4 percent, respectively.

If the labor force is growing at a 3% rate and the efficiency of a unit of labor is growing at a 1% rate, then the number of effective workers is growing at a rate of A) 1% B) 2% C) 3% D) 4%

D) 4%

Suppose output per worker is given by the square root of the capital stock. If the saving rate is 30% and the depreciation rate is 10%, what is steady-state capital per worker? A) 1 B) 2 C) 4 D) 9

D) 9

In the Solow growth model, if investment is less than depreciation, the capital stock will ______ and output will ______ until the steady state is attained. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease

D) decrease; decrease

Job-training programs are designed to affect the job ---- rate and thereby ---- the natural rate of unemployment. A) separation; raise B) separation; reduce C) finding; raise D) finding; reduce

D) finding; reduce

In the Solow growth model, with a given production function, depreciation rate, no technological change, and no population growth, a higher saving rate produces a: A) higher MPK in the new steady state. B) higher steady-state growth rate of total output. C) higher steady-state growth rate of output per worker. D) higher steady-state level of output per worker.

D) higher steady-state level of output per worker.

In the Solow growth model, with a given production function, depreciation rate, saving rate, and no technological change, lower rates of population growth produce: A) lower steady-state levels of output per worker. B) lower steady-state ratios of capital per worker. C) lower steady-state growth rates of output per worker. D) lower steady-state growth rates of total output.

D) lower steady-state growth rates of total output.

Government policies directed at reducing frictional unemployment include: A) increasing the earned income credit. B) abolishing minimum-wage laws. C) making the government part of the union-firm wage bargaining process. D) making unemployment insurance 100 percent experience rated.

D) making unemployment insurance 100 percent experience rated.

In the Solow growth model of an economy with population growth but no technological change, if population grows at rate n, then capital grows at rate ______ and output grows at rate ______. A) 0; n B) 0; 0 C) n; 0 D) n; n

D) n; n