chapter 7

The value of all the equipment and structures of an economy is referred to as: A) national income. B) capital stock. C) wealth. D) asset value.

B) capital stock.

With a given level of GDP, a decrease in the size of population would cause: A) life expectancy to increase. B) life expectancy to decrease. C) GDP per capita to increase. D) GDP per capita to decrease.

C) GDP per capita to increase.

Which of the following statements is true? A) A nation with a high savings rate will accumulate capital slowly. B) A nation with a high savings rate will accumulate capital rapidly. C) In a closed economy, government spending equals zero. D) In a closed economy, aggregate consumption equals zero.

B) A nation with a high savings rate will accumulate capital rapidly.

Consider a closed economy without the government. If the GDP of the economy is $25,000 and the savings rate in the economy is 25%, the aggregate savings in the economy is: A) $3,320. B) $6,250. C) $8,000. D) $8,650.

B) $6,250.

If GDP per capita in year T is represented by YT, and the GDP per capita in the following year is represented by YT+1, then the formula for calculating growth rate between these two years is ________. A) (YT+1/YT)/100 B) (YT+1 - YT)/YT C) (YT+1 + YT)/YT D) (YT+1 + YT)/YT+1

B) (YT+1 - YT)/YT

the aggregate savings in an economy is $1,750 and the GDP of the economy is $55,000. The savings rate in the economy is: A) 1.8%. B) 3.15%. C) 8.96%. D) 10%.

B) 3.15%.

How does the concept of catch-up growth explain the diminishing income gap between the developing economies and developed economies?

: Catch-up growth refers to the process whereby relatively poorer nations increase their incomes by taking advantage of knowledge and technologies already invented in other, technologically more advanced countries. Developing economies undergoing catch-up growth do so mostly by benefiting from technologies that are already available with developed economies. Along with technology transfers, if these economies increase their savings rates, efficiency units of labor, and efficiency of production, it makes it possible for them to catch-up with the incomes of the developed economies. Many economies have been doing so, and overtime this has caused the income gap between the developing economies and developed economies to diminish.

On an average, growth in per capita income is associated with a: A) fall in poverty. B) rise in poverty. C) fall in inequality. D) rise in inequality.

A) fall in poverty.

The implication of the Solow model is that for sustained growth: A) the ratio of capital stock to GDP should be constant as the economy grows over time. B) the ratio of capital stock to GDP should decreases the economy grows over time. C) the ratio of savings rate to depreciation rate should be constant as the economy grows over time. D) the ratio of savings rate to depreciation rate should increase as the economy grows over time.

A) the ratio of capital stock to GDP should be constant as the economy grows over time.

What is the capital accumulation equation used by Solow?

According to Solow, the capital in the current year is equal to the capital of last year less the depreciated capital plus the level of investment. This implies: Kcurrent year = Klast year - Kdepreciated + I or, Kcurrent year = Klast year - (depreciation rate × Klast year) + I or, Kcurrent year = (1 - depreciation rate) × Klast year + I

If a country is growing at an annual growth rate of 5%, what will be its GDP after 5 years? A) 1.8 times the current GDP B) 1.28 times the current GDP C) 3.21 times the current GDP D) 5 times the current GDP

B) 1.28 times the current GDP

Which of the following is a limitation of using arithmetic averages to calculate growth rates? A) Arithmetic averages are difficult to calculate. B) Arithmetic averages cannot be used in case of negative growth. C) Arithmetic averages do not capture the exponential nature of growth and thus are not apt for long-run prediction. D) The calculation of growth using arithmetic averages requires more data than other methods.

C) Arithmetic averages do not capture the exponential nature of growth and thus are not apt for long-run prediction.

An increase in which of the following factors can lead to sustained growth of a nation in the Solow model? A) Savings rate B) Physical capital C) Human capital D) Technology

D) Technology

Which of the following statements is true? A) Arithmetic or geometric growth rates gives similar answers for long periods. B) Arithmetic calculation of growth rate considers the exponential nature of growth. C) Geometric average of growth rate ignores the exponential nature of growth. D) Using either arithmetic or geometric average to compute average growth rates gives similar answers for short periods.

D) Using either arithmetic or geometric average to compute average growth rates gives similar answers for short periods.

Country A's GDP per capita in the beginning of 2005 was $22,150. In the beginning of 2006, it increased to $27,600. Calculate country A's growth rate of GDP per capita between 2005 and 2006.

In this case, the growth rate of GDP per capita of country A = ($27,600 - $22,150)/$22,150 = 0.2460 = 24.60%.

What was the Industrial Revolution? How did it contribute to modern economic growth?

Industrial Revolution is the term used for describing the series of innovation and their implementation in the production process that started to take place at the end of the 18th century in Britain. The revolution contributed to modern economic growth by opening the way for more steady and rapid technological changes. It started a wave of industrialization that spread to many other countries around the world.

What are the factors that affect GDP according to the aggregate production function used by Solow?

The aggregate production function used by Solow expresses GDP as a function of three factors of production. These are: a) physical capital. b) total efficiency units of labor. c) level of technology.

Explain how savings equals investment in a closed capitalist economy?

The national income identity is given by Y = C + I + G + NX, where, C is the consumption expenditure, I is the investment expenditure, G is the Government Spending, and NX is the net exports. In a closed capitalist economy, Y = C + I. In other words, GDP is the sum of aggregate consumption expenditure and investment. It is also true, that in a closed economy without government spending, all the income generated will be either consumed or saved. Hence, Y = C + S. Since Y = C + S = C + I → S = I.

What will happen to the steady-state equilibrium level of output and capital stock in an economy if: a) there is an increase in the savings rate. b) there is a deterioration of human capital.

a) If there is an increase in the savings rate of an economy, it will have a steady-state equilibrium with a higher level of capital stock and income than the initial steady-state equilibrium levels. b) If there is deterioration of human capital in an economy, it will have a steady-state equilibrium with a lower level of capital stock and income than the initial steady-state equilibrium levels.

If the depreciation rate in an economy is 10%, and the capital stock in the economy is $1,000, the level of investment required to keep the economy at a steady state is equal to: A) $100. B) $110. C) $250. D) $1,000.

A) $100.

Which of the following statements is true? A) Extremely high savings rate can be counterproductive for an economy in short term. B) The greater the savings rate in an economy, the slower is the rate of capital accumulation. C) For positive growth, consumption in an economy should always be less than savings. D) The greater the consumption expenditure in an economy, the faster is capital accumulation

A) Extremely high savings rate can be counterproductive for an economy in short term

If a country increases its savings rate, the steady-state equilibrium level of: A) GDP will increase. B) capital stock will decrease. C) investment will decrease. D) efficiency units of labor will increase.

A) GDP will increase.

________ is defined as the change in quantity between two dates. A) Growth rate B) Progress index C) Improvement ratio D) Development ratio

A) Growth rate

Which of the following statements is true? A) Higher interest rates typically encourage more savings. B) Savings of households are independent of tax rates. C) Households that expect an increase in future earnings are likely to save more. D) An increase in the consumption of households increases savings of the households.

A) Higher interest rates typically encourage more savings.

Which of the following statements is true of the Industrial Revolution? A) It was a gradual process. B) It was a period of rapid disruption. C) It started in the United States. D) It started in the capital goods industry.

A) It was a gradual process.

Which of the following statements is true of the U.S. economy in the last 200 years? A) The GDP per capita has increased. B) The GDP per capita has decreased. C) There has been no contraction in the economy. D) The growth rate of GDP has been more than 10% per year.

A) The GDP per capita has increased.

Which of the followings statements is true? A) The amount of capital accumulation increases with decreases in the depreciation rate of capital. B) The amount of capital accumulation increases with increases in the depreciation rate of capital. C) The depreciation rate of capital increases with an increase in the investment amount on capital. D) The depreciation rate of capital increases with a decrease in the investment amount on capital.

A) The amount of capital accumulation increases with decreases in the depreciation rate of capital.

Which of the followings statements is true? A) The amount of capital accumulation will be higher if the capital stock of last year was high. B) The amount of capital accumulation will be higher if the capital stock of last year was low. C) The amount of depreciation will be lower if the investment on capital last year was high. D) The amount of depreciation will be higher if the investment amount on capital last year was low.

A) The amount of capital accumulation will be higher if the capital stock of last year was high.

Which of the following statements identifies a correct reason for demographic transition? A) The dependence on child labor is negligible in urban families in comparison to rural families. B) The increase in migration of labor from urban to rural areas reduces fertility. C) The cost of rearing children is comparatively lower for urban families in comparison to rural families. D) Transition from a rural economy to an urban economy reduces income below subsistence that reduces fertility and the size of families.

A) The dependence on child labor is negligible in urban families in comparison to rural families.

Suppose in a country, the working-age population doubles due to immigration. However, the country neglects investment in research and development and hence the country's level of technology is stagnant. Which of the following statements will be true of this economy? A) The economy cannot achieve a sustained growth. B) The economy will experience steady economic growth. C) The economy's output will rise at an increasing rate over time. D) The savings rate will remain stagnant over the years

A) The economy cannot achieve a sustained growth.

Movements away from equilibrium in the Solow model: A) are automatically corrected. B) persist and cannot be corrected. C) are corrected only through government intervention. D) are corrected only when the country opens up to international trade.

A) are automatically corrected.

Singapore had a GDP per capita of $395 in 1960, and $52,918 in 2013. The U.S had a GDP per capita of $2,881 in 1960 and $52,839 in 2013. Such a growth is referred to as: A) catch-up growth. B) sustained growth. C) instant growth. D) disguised growth.

A) catch-up growth.

According to Malthus, if the standard of living is above subsistence: A) couples have more children. B) couples have fewer children. C) consumption is more than savings. D) savings is more than consumption

A) couples have more children.

The phenomenon of equipment or structure going through "wear and tear" and eventually becoming obsolete is referred to as: A) depreciation. B) capital tear. C) creative destruction. D) intertemporal loss.

A) depreciation.

When current growth builds on past growth, growth is: A) exponential. B) linear. C) logarithmic. D) negative.

A) exponential.

For the U.S. economy, on an average: A) growth resulting from technology is greater than the growth resulting from human capital. B) growth resulting from technology is smaller than the growth resulting from physical capital. C) growth resulting from technology equal to the growth resulting from human capital. D) growth resulting from technology equal to the growth resulting from physical capital.

A) growth resulting from technology is greater than the growth resulting from human capital.

If a country's human capital improves, ________. A) the country will have a greater GDP for a given level of capital stock B) the country will have a lower GDP for a given level of capital stock C) the country will have more poverty for a given level of capital stock D) the country will have more inequality for a given level of capital stock

A) the country will have a greater GDP for a given level of capital stock

The savings rate designates: A) the fraction of income that households save. B) the difference between household consumption and savings. C) the rate of return households earn on their savings. D) the difference between government revenue and government expenditure

A) the fraction of income that households save.

Sustained growth refers to a growth process: A) where GDP per capita grows at a positive and steady rate for long periods of time. B) where GDP per capita grows at a rate of more than 20% per year for long periods of time. C) where growth in GDP per capita is attributed primarily to public sector firms and enterprises. D) where growth in GDP per capita is translated into equal increase in welfare for all citizens in the country.

A) where GDP per capita grows at a positive and steady rate for long periods of time.

Consider two countries: A and B. Assume that both countries are exactly similar until the year 2000. At the beginning of year 2000, both countries decide to change their strategy for economic growth. Country A plans to encourage immigration and increase human capital in the economy to achieve sustained growth, while Country B decides to make large investments in research and development to achieve sustained growth. Which of the two countries is more likely to experience sustained growth and why?

Among the two countries, country B is more likely to experience sustained growth. This is because its approach to growth involves improving production technology, while country A's approach to growth is involves increasing the total efficiency units of labor. Holding all other factors of production constant, if a country increases its workforce, every additional worker will increase GDP by less and less because of diminishing marginal product of total efficiency units of labor. On the other hand, investment in research and development is likely to increase the level of technology available with country B. Technology is a factor of production the growth of which is exponential. This is because new technology builds on existing technology. Since the growth in technology is exponential, it is the only factor of production, improvements in which need not necessarily run into diminishing marginal product. For this reason, country B which is investing in technology is more likely to experience sustained growth.

If the savings rate in an economy is 30%, and the level of investment in the economy is $400, the GDP of the economy must be: A) $1,111.22. B) $1,333.33. C) $1,750.50. D) $1,900.25.

B) $1,333.33.

Suppose the investment on capital in an economy is $40,000. The current capital stock in the economy is $80,000. If the depreciation rate of capital is 10%, the accumulated capital in the year is: A) $40,000. B) $112,000. C) $124,000. D) $184,000.

B) $112,000.

If the savings rate in an economy is 30%, and the GDP of the economy is $1,000, then the level of investment in the economy will be: A) $150. B) $300. C) $330. D) $600.

B) $300.

Consider two economies: A and B that are completely similar, except their savings rate. The savings rate in economy A is greater than the savings rate in economy B. Which of the following statements is true? A) Rate of capital accumulation will be the same in both economies. B) Capital accumulation will be faster in economy A in comparison to economy B. C) Capital accumulation will be faster in economy B in comparison to economy A. D) Growth rate in country B is likely to be higher than the growth rate of country A in the long-run.

B) Capital accumulation will be faster in economy A in comparison to economy B.

Which of the following statements is true? A) Countries with lower investment in research and development (R&D) are likely to have higher standards of living. B) Countries with a higher investment in research and development (R&D) are likely to have higher standards of living. C) The Industrial Revolution started in the United States and spread to other parts of the world. D) The Industrial Revolution started in South America and spread to other parts of the world.

B) Countries with a higher investment in research and development (R&D) are likely to have higher standards of living.

Which of the following statements is true? A) Growth in technology is linear in nature. B) Growth in technology is exponential in nature. C) Growth in labor productivity is exponential in nature. D) Growth in land productivity is exponential in nature.

B) Growth in technology is exponential in nature.

Which of the following statements is true of growth in the U.S. economy from 1950 to 2007? A) Growth resulting from technology > growth resulting from human capital > growth resulting from physical capital B) Growth resulting from technology > growth resulting from physical capital > growth resulting from human capital C) Growth resulting from physical capital > growth resulting from technology > growth resulting from human capital D) Growth resulting from human capital > growth resulting from technology > growth resulting from physical capital

B) Growth resulting from technology > growth resulting from physical capital > growth resulting from human capital

If s denotes savings rate, I denotes aggregate investment, and Y denotes GDP, then which of the following equations is correct? A) Y = s × I B) I = s × Y C) I =s/Y D) I = Y/s

B) I = s × Y

Which of the following equations captures the aggregate capital stock of the economy in this year, Know? A) Know = (1 + depreciation rate) × Klastyear + I B) Know = (1 - depreciation rate) × Klastyear + I C) Know = (1 - depreciation rate) × Klastyear × I D) Know = (1 - depreciation rate) × Klastyear - I

B) Know = (1 - depreciation rate) × Klastyear + I

Which of the following statements is true? A) Life expectancy around the world was much higher 70 years ago than it is today. B) Life expectancy around the world was much lower 70 years ago than it is today. C) There is no gap between the life expectancy rates in rich and poor nations today. D) Global drug innovation helped lower the life expectancy rate around the world.

B) Life expectancy around the world was much lower

Which of the following statements is true of Malthus's theory? A) Malthus suggested that in the long run, income levels will grow exponentially. B) Malthus suggested that in the long run, income levels will stay at subsistence. C) Malthus suggested that fertility level of the population will remain constant over time. D) Malthus suggested that the life expectancy of the population will remain constant over time.

B) Malthus suggested that in the long run, income levels will stay at subsistence.

Which of the following events opened the way for rapid and steady technological changes that underpinned modern economic growth? A) The American Civil War B) The Industrial Revolution C) The Agricultural Revolution D) Demographic transition in the Western world

B) The Industrial Revolution

Which of the following statements is true? A) The GDP per capita has almost been constant since the beginning of the 20th century in most of the western world. B) The average GDP per capita of a nation at a particular point of time is not the same as the income of all individuals in that nation. C) GDP per capita is a useful to tool to study the disparities in standards of living in a country. D) GDP per capita decreases with a decrease in population and increases with an increase in population, GDP remaining unchanged.

B) The average GDP per capita of a nation at a particular point of time is not the same as the income of all individuals in that nation.

Consider two countries: A and B. In country A, the annual growth rate of GDP per capita is 2%, while in country B the annual growth rate of GDP per capita is 6%. At present, country B's GDP per capita is higher than country A's GDP per capita. Which of the following statements will then be true? A) The gap between country A's GDP per capita and country B's per capita will decrease over time. B) The gap between country A's GDP per capita and country B's per capita will widen over time. C) The gap between country A's GDP per capita and country B's per capita will remain the same. D) The gap between country A's GDP per capita and country B's GDP per capita will decrease for the first few years and then will increase later.

B) The gap between country A's GDP per capita and country B's per capita will widen over time.

Which of the following statements is true? A) The United States and the United Kingdom have recorded a growth rate of over 10% per annum in the last 40 years. B) The gap between the GDP per capita of the United States and China has decreased over the last 40 years. C) The gap between the GDP per capita of the United States and Singapore has increased over the last 40 years. D) The growth rate of South Korea has been less than the growth rate of the United States over the last 40 years.

B) The gap between the GDP per capita of the United States and China has decreased over the last 40 years.

Which of the following statements is true? A) To depict variables that have exponential growth, it is more convenient to use an axis with a linear scale. B) To depict variables that have exponential growth, it is more convenient to use an axis with a proportional scale. C) Exponential growth refers to growth by the same amount in every time period. D) Linear growth refers to growth by the same proportion in every time period.

B) To depict variables that have exponential growth, it is more convenient to use an axis with a proportional scale.

Which of the following statements is true? A) After the demographic transition in the 19th century, they were recurrent Malthusian cycles. B) Until the demographic transition in the 19th century, they were recurrent Malthusian cycles. C) The demographic transition of the 19th century led to an increase in fertility across the Western world. D) The demographic transition of the 19th century led to a decrease in life expectancy across the Western world.

B) Until the demographic transition in the 19th century, they were recurrent Malthusian cycles.

A steady-state equilibrium refers to: A) an equilibrium in which the GDP per capita remains constant over time. B) an equilibrium in which the stock of physical capital remains constant over time. C) an equilibrium in which the inequality remains constant over time. D) an equilibrium in which the poverty rate remains constant over time.

B) an equilibrium in which the stock of physical capital remains constant over time.

A growth process whereby relatively poorer nations increase their income by taking advantage of knowledge and technologies already invented in other, technologically more advanced countries is referred to as: A) transfer growth. B) catch-up growth. C) trade-based growth. D) innovative growth.

B) catch-up growth.

The ________ nature of economic growth is one of the major reasons why there are large differences in GDP per capita across countries. A) linear B) exponential C) logarithmic D) quadratic

B) exponential

Real GDP refers to GDP adjusted: A) for changes in tax rates. B) for changes in prices. C) for changes in net imports. D) for changes in ruling political party

B) for changes in prices.

The rate of return that households expect on their savings is determined by: A) tax rates. B) interest rates. C) exchange rates. D) government expenditure.

B) interest rates.

The advantage of using real GDP over nominal GDP is that: A) it is easier to calculate. B) it can be compared over time. C) it takes into account the distribution of income. D) it takes into account changes in ruling political party.

B) it can be compared over time.

Consider a closed economy without the government. If the savings rate in the economy is 20% and the aggregate savings is $10,000, the aggregate consumption in the economy is: A) $10,000. B) $37,000. C) $50,000. D) $45,000.

C) $50,000.

Consider a closed economy without the government. If the GDP of the economy is $63,000 and the consumption in the economy is $45,000, the savings rate in the economy is: A) 16.86%. B) 24%. C) 28.57%. D) 35.75%.

C) 28.57%.

If the level of investment in an economy is $4,000 and the GDP of the economy is $10,000, the savings rate in the economy must be: A) 20%. B) 30%. C) 40%. D) 44%.

C) 40%.

Which of the following correctly identifies a Malthusian cycle? A) Increase in GDP would increase GDP per capita above subsistence, which will cause a decrease in the size of population that would reduce pressure on resources and increase GDP per capita further. B) Increase in GDP would increase GDP per capita above subsistence, which will cause an increase in the size of population that would increase pressure on resources and that would further increase GDP per capita. C) Increase in GDP would increase GDP per capita above subsistence, which will cause an increase in the size of population which would increase pressure on resources and eventually reduce GDP per capita. D) Decrease in GDP would decrease GDP per capita below subsistence, which will cause an increase in the size of population which would increase pressure on resources and eventually reduce GDP per capita.

C) Increase in GDP would increase GDP per capita above subsistence, which will cause an increase in the size of population which would increase pressure on resources and eventually reduce GDP per capita.

Which of the following statements is true of the U.S. economy before 1800? A) There were no major achievements in arts. B) There were no major achievements in science and technology. C) Sustained economic growth was rare or absent in the U.S. economy. D) The U.S. economy was growing at an average rate of more than 6% per annum.

C) Sustained economic growth was rare or absent in the U.S. economy.

The process by which the stock of equipment and structures available to an economy is increased by investment is referred to as: A) investment growth. B) output expansion. C) capital accumulation. D) autonomous growth.

C) capital accumulation.

The demographic transition refers to the: A) increase in fertility and number of children per family that many societies undergo as they transition from industry to agriculture. B) increase in fertility and number of children per family that many societies undergo as they transition from agriculture to industry. C) decrease in fertility and number of children per family that many societies undergo as they transition from agriculture to industry. D) decrease in fertility and number of children per family that many societies undergo as they transition from industry to agriculture

C) decrease in fertility and number of children per family that many societies undergo as they transition from agriculture to industry.

A ________ traces out the behavior of the economy over time. A) comparative equilibrium B) steady-state equilibrium C) dynamic equilibrium D) static equilibrium

C) dynamic equilibrium

The process by which a quantity grows at a constant proportion in every time period is referred to as: A) linear growth. B) vector growth. C) exponential growth. D) logarithmic growth.

C) exponential growth.

If the effects of growth in a variable compound are approximately constant, then growth is likely to be: A) linear. B) vector. C) exponential. D) logarithmic.

C) exponential.

For the U.S. economy, on an average: A) growth resulting from technology is smaller than the growth resulting from human capital. B) growth resulting from technology is smaller than the growth resulting from physical capital. C) growth resulting from physical capital is greater than the growth resulting from human capital. D) growth resulting from physical capital is smaller than the growth resulting from human capital.

C) growth resulting from physical capital is greater than the growth resulting from human capital.

For the capital stock of the economy to remain constant over time the amount of investment: A) must exceed the depreciated value of capital stock. B) must be less than the depreciated value of capital stock. C) must be equal to the depreciated value of capital stock. D) must be equal to the depreciated value of capital stock times the savings rate of the economy.

C) must be equal to the depreciated value of capital stock.

In a closed economy: A) investment is equal to zero. B) consumption is equal to zero. C) net exports is equal to zero. D) government spending is equal to zero.

C) net exports is equal to zero.

In a closed economy, without the government: A) consumption equals savings. B) consumption equals investment. C) savings equals investment. D) savings equals net exports.

C) savings equals investment.

The implied growth rate for a country between 1960 and 2010 is 6%. This implies that: A) the country needed to grow by at least 6% in any of the fifty years between 1960 to 2010 to reach the level of GDP in 2010 starting with the 1960 level. B) the growth rate of GDP in the country was above 6% between 1960 to 1990 and above 6% between 1991 and 2010. C) the country needed to grow at an average rate of 6% per year between 1960 and 2010 to reach the 2010 level of GDP starting with the 1960 level. D) the country needed to grow at rates above 6% per year between 1960 and 2010 to reach the 2010 level of GDP starting from the 1960 level.

C) the country needed to grow at an average rate of 6% per year between 1960 and 2010 to reach the 2010 level of GDP starting with the 1960 level.

According to the Solow model, given the levels of total efficiency units of labor and technology: A) increases in the savings rate is the sole reason for sustained economic growth. B) increases in the rate of physical capital accumulation can be the sole reason for sustained economic growth. C) there is a maximum fixed level of GDP that an economy can achieve by increasing savings. D) efficiency units of labor do not play any role in the determination of steady-state equilibrium level of GDP.

C) there is a maximum fixed level of GDP that an economy can achieve by increasing savings.

Consider a closed economy without the government. If the savings rate in the economy is 15% and the aggregate savings is $6,000, the GDP of the economy is: A) $15,000. B) $27,000. C) $30,000. D) $40,000.

D) $40,000.

Which of the following statements is true? A) Economic growth always reduces poverty. B) Economic growth always reduces inequality. C) Economic growth is ineffective in reducing both poverty and inequality. D) Economic growth can reduce poverty only if it is not associated with a significant rise in inequality.

D) Economic growth can reduce poverty only if it is not associated with a significant rise in inequality.

Economic growth refers to an increase in: A) prices. B) tax rates. C) population. D) GDP per capita.

D) GDP per capita.

Which of the following is a problem associated with extreme levels of poverty? A) High literacy B) Low fertility C) High life expectancy D) High infant mortality

D) High infant mortality

If d is the depreciation rate and K is the capital stock, the amount of investment required to keep the economy in a steady state is given by: A) I = d/K. B) I = d + K. C) I = d - K. D) I = d × K.

D) I = d × K.

Which of the following statements is true of world GDP before 1800? A) Most of the countries were growing at a rate of more than 6% per year. B) The GDP per capita in all nations was less than $500. C) The entire world population was living above the subsistence level of income. D) Increase in GDP resulted in increase in consumption but not investment.

D) Increase in GDP resulted in increase in consumption but not investment.

Continuous increase in investment in which of the following is most likely to cause sustained growth? A) Land B) Labor C) Capital D) Technology

D) Technology

Which of the following factors of production is least likely to show diminishing marginal product? A) Land B) Labor C) Capital D) Technology

D) Technology

Which of the following is most likely if there is a war that destroys a country's stock of capital to a level below the steady state equilibrium? A) The GDP will be equal to the steady-state equilibrium level of GDP. B) The GDP will be more than the steady-state equilibrium level of GDP. C) The investment in capital will suffice to replenish the depreciating capital. D) The investment in capital will be lower than the amount required to replenish the depreciating capital.

D) The investment in capital will be lower than the amount required to replenish the depreciating capital.

Which of the following statements is true? A) Economic growth is the direct cause of declining poverty. B) Economic growth is the direct cause of declining inequality. C) Growth in unemployment is the direct cause of declining poverty. D) There are some countries where growth and poverty have both increased.

D) There are some countries where growth and poverty have both increased.

The savings rate in an economy equals: A) GDP minus aggregate consumption. B) GDP divided by aggregate savings. C) aggregate savings multiplied by GDP. D) aggregate savings divided by GDP.

D) aggregate savings divided by GDP.

In a closed economy without the government, income equals: A) aggregate consumption. B) aggregate savings. C) aggregate savings plus aggregate investment. D) aggregate savings plus aggregate consumption.

D) aggregate savings plus aggregate consumption.

The Solow Growth Model is a tool that is used for studying: A) how net exports are determined. B) how aggregate demand is determined. C) how aggregate supply is determined. D) how aggregate income is determined.

D) how aggregate income is determined.

The aggregate production function used in the Solow model expresses GDP as a function of: A) physical capital and level of technology. B) physical capital and total efficiency units of labor only. C) level of technology and total efficiency units of labor only. D) physical capital, level of technology, and total efficiency units of labor.

D) physical capital, level of technology, and total efficiency units of labor.

Rapid population growth in Malthus's theory is constrained through: A) higher fertility and mortality. B) reduced fertility and mortality. C) higher fertility and reduced mortality. D) reduced fertility and higher mortality.

D) reduced fertility and higher mortality.

Exponential growth implies that: A) growth rates can only be positive. B) growth rates will alternate between positive and negative values in every consecutive time period. C) relatively large differences in growth rates will translate into small differences in the level of a quantity after many years of growing. D) relatively small differences in growth rates translates into large differences in the level of a quantity after many years of growing.

D) relatively small differences in growth rates translates into large differences in the level of a quantity after many years of growing.

Activities that firms, universities, and governments undertake to increase their knowledge base are referred to as: A) primary activities. B) secondary activities. C) tertiary activities. D) research and development (R&D) activities.

D) research and development (R&D) activities.

Assuming all else equal, if the production technology available to a nation improves, its aggregate production function: A) becomes horizontal. B) becomes vertical. C) shifts inward. D) shifts upward.

D) shifts upward.

The minimum level of income per person that is generally necessary for the individual to obtain enough calories, shelter, and clothing to survive is referred to as: A) safety level of income. B) minimum wage rate. C) survival wage rate. D) subsistence level of income.

D) subsistence level of income.

Fertility refers to: A) the average period that an individual may be expected to live. B) the ability of an individual to read or write in at least one language. C) the ratio of deaths in an area to the population of the area. D) the number of children per adult or per woman of childbearing age.

D) the number of children per adult or per woman of childbearing age.

What is meant by demographic transition? How is it responsible for modern growth?

Demographic transition refers to the decline in fertility and number of children per family that many societies undergo as they transition from agriculture to industry. Demographic transition is a central ingredient to modern growth because it enabled the economies that experienced reduced fertility to break away from the Malthusian cycle of sustained low GDP per capita.

Which characteristic of economic growth is responsible for the large differences in GDP per capita across countries?

Economic growth is exponential in nature and this in one of the major reasons for the large differences in GDP per capita across countries. When an economy grows exponentially, new growth builds on past growth and the effects of growth compound. This implies that relative modest differences in growth rates translate into large differences in the level of GDP per capita after many years of growing.

Describe the Malthusian Cycle.

Malthusian cycle refers to the preindustrial pattern in which increases in aggregate income lead to an expanding population, which in turn reduces income per capita and puts a downward pressure on population. The cycle starts with an increase in GDP above the subsistence level, which in turn fuels population growth, which increases the pressure on existing resources and reduces GDP per capita.

Why is investing in technology a better option than investing in labor or capital as a means to sustained growth?

The main reason why investing in technology is a better option than investing in labor or capital as a means to sustained growth is that investing in labor and capital is subject to diminishing marginal product. This implies that the additional output generated by investing in an extra unit of capital or labor diminishes as we have more of capital and labor. Hence, growth cannot be sustained by investing only on labor or capital. On the other hand, investment in technology builds on previous stocks of technology. Hence, technological growth is exponential in nature.

Consider two countries: a) In the first country there are 1,000 individuals; among them 500 earn $20,000 per month and the remaining 500 earn $400 per month. b) In the second country there are 1,000 people; among them 500 earn $12,000 per month and the remaining 500 people earn $600 per month. Which of the two countries has more inequality and which country is poorer of the two?

The per capita income in the first country is equal to (500 × 20,000 + 500 × 400)/1,000 = $10,200. The per capita income in the second country is equal to (500 × 12,000 + 500 × 600)/1000 = 6,300. From the per capita income figures we can conclude that the second country is poorer than the first country. Now, ratio of rich-to-poor incomes in the first country = 10,000,000/20,000 = 50. The same ratio in the second country = 6,000,000/30,000 = 20. It is seen that the ratio of high earners income to low earners income is much higher in the first country. Thus, inequality is more in the first country.

Define savings rate. If the aggregate savings in an economy is $10,000 and the aggregate income in the economy is $70,000, what is the savings rate in the economy?

The savings rate refers to the fraction of income that households save. It can be obtained by dividing aggregate savings by aggregate income. In this case, the savings rate = 10,000/70,000 = 0.1428 = 14.28%.

Define subsistence level. What happens if the income in an economy exceeds the subsistence level in Malthus cycle?

The subsistence level is the minimum level of income per person that is generally necessary for the individual to obtain enough calories, clothing, and shelter to survive. If the income in an economy exceeds the subsistence level, the fertility in the economy increases, which in turn increases the size of population of the economy.

What were the major reasons for the lack of sustained growth before modern times?

There were two main reasons for the lack of sustained growth before modern times. These were: a) The pace of technological change before the year 1800 was slow and almost stagnant compared to what came thereafter. b) Whatever improvements in income or GDP were realized went to feed an increasing population rather than in an attempt to increase the GDP per capita.

Consider two economies with the same GDP per capita: Barylia and Lithasia. The savings rate in Barylia is 20% while the savings rate in Lithasia is 60%. a. Which of these two countries is likely to accumulate capital faster? b. The government in Barylia decides to provide incentive to its citizens to increase the savings rate further to 80% as a means to improve standards of living. Will the increase in savings and thus investment and output translate into improvements in the standard of living?

a. The amount of capital accumulation in an economy is equal to the capital stock of last year, minus depreciated capital, plus the level of investment in an economy. Hence, as the level of investment increases, the amount of capital accumulation increases. The investment in an economy equals I = savings rate × GDP per capita. Therefore, it can be inferred that higher the savings rate in an economy, higher is the investment in the economy. Hence, higher the savings rate in an economy, higher is the capital accumulation in the economy. Lithasia is likely to accumulate capital faster compared to Barylia. b. The total amount of income in an economy is either consumed or saved. The standard of living in any country is dependent on consumption and not on savings. Hence, if the government encourages households to save more, increase in investment and output may not translate into improvements in living standards of the people in the country.