EC 309
The United States and Chile have both grown at about 2 percent per year for the last 40 years. By principle of transition dynamics, what does this imply?
Both countries are at their steady states.
T/F A U.S. citizen works for a U.S. company in Germany. The income earned by the citizen increases U.S. GDP.
False
T/F If an economy has a higher investment rate and a higher depreciation rate, the economy will have a higher level of output.
False
T/F The fraction of people living in poverty has risen since 1960 as the populations of India and China have grown substantially.
False
The influences of institutions on economic performance can be easily contrasted using:
North and South Korea
According to the principle of transition dynamics, which economy will grow fastest?
The same country 1 year after the natural destroyed most of the capital stock.
T/F If real GDP increases by 2 percent and nominal GDP increases by 4 percent, then inflation is approximately 2 percent.
True
The birthplace of modern economic growth was in _______ during the ________ century.
United Kingdom; mid 18th
Which of the following questions does the Solow model NOT help to explain?
Why do countries sustain growth in the long run?
According to the expenditure approach, if Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports, the national income identity can be written as:
Y = C + I + G + NX
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 do we generally consider in a simple production function?
capital
A central less on the Solow model is that:
capital accumulation cannot save 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.
One of the key characteristics of the Cobb-Douglas production function is:
constant returns to scale.
In 2018, the largest share of GDP was
consumption
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, 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 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 of the economy is below Y*. But, in the long run, the ________ returns to capital accumulation lead the return to these investment 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.
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
The bar over the A means that it is a:
parameter that is fixed and exogenous.
In the Solow model, the steady-state level of output per worker is a function of:
productivity, the depreciation rate, and the saving rate.
In the Solow model, the steady-state capital stock is a function of:
productivity, the depreciation rate, the labor stock, and the saving rate.
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.
productivity; saving rate
A firms profit is simply defined as:
revenues minus costs
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, 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 _______, while the amount of investment is a ________.
stock; flow
How quickly GDP doubles will depend on:
the growth rate of GDP.
Starting from the steady state, a permanent increase in the rate of depreciation in the Solow model cause
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.
Which of the following does NOT explain differences in total factor productivity?
the labor stock
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
An increase _______ 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
In the equation y=A(bar)k^1/3, A(bar) represents:
total factor productivity.
The analysis of how an economy approaches the steady state is called:
transition dynamics
Nominal GDP is the _______ of all final good and services produced in a period of time using _______ prices.
value; current
The steady state is defined as the point where capital accumulation is equal to:
zero
After graduating college, you start a job making $40,000. Your earnings grow at a constant growth rate of 3% per year. When you retire 40 years later, you are earning approximately:
$130,000
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
If exports are $10 billion and imports are $3 billion, net exports are _______ and the country has a trade________.
$7 billion; surplus
Between 1970 and 1976, Israel's average inflation rate was about 65% per year. With that rate of inflation, prices would double about every _______ years, using the rule of 70.
1.1
With an average annual growth rate of 5% per year, per capita income will increase by what factor over a century?
126
If per capita GDP in 2015 was $1,000 and in 2016 was $1,200, the growth rate of per capita GDP was:
20%
If the population of Romania was about 20.3 million in 1970 and the average population growth rate is 0.2 percent, then Romania's population would have been about _______ million in 2010.
22
The era of modern economic growth began about:
250 years ago.
If Y = AK 1/3 L 2/3 and A grows at a rate of 2 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
3%
Over the past 50 years, Brazil's population growth rate has averaged about 2.3 percent. According to the rule of 70, Brazil's population will double in about _______ years.
30
Which of the following is/are NOT included in the expenditure approach to national income accounting?
All of the above.
Which of the following explains the differences in total factor productivity?
All of these answers are correct.
According to the rule of 70,if an economy averages a 4 percent growth rate, it will take about ______ years to double in size.
17.5
As a rough approximation, differences in capital per person explain about _______ of the difference in incomes between the richest and poorest countries, while differences in _______ explain _________.
one-fourth; total factor productivity; three-fourths.
Despite the costs associated with economic growth, most believe:
the benefits far outweigh the costs.
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%
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%
Under national income accounting, GDP equals
All of these choices are correct.
What is an explanation for why an economy eventually settles in steady state?
All of these choices are correct.
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 $12,000
T/F If population and GDP are growing at the same rates, then per capita GDP does not grow.
True
T/F In the Solow diagram, an increase in the investment rate will cause a decrease in consumption for all levels of capital.
True
T/F In the long run, the real interest rate is equal to the marginal product of capital.
True
T/F Per capita GDP can grow at a negative rate.
True
T/F The behavior of Germany's per capita income after WW2 is an example of convergence.
True
T/F The change in the capital stock is a flow variable.
True
T/F The depreciation of fixed capital is a part of Gross Domestic Product but not part of Net Domestic Product.
True
T/F Total factor productivity explains a larger amount of the difference in income per capita in the Solow model than in the production model.
True
T/F Wages in Ancient Greece and Rome were approximately equal to wages in 17th century France.
True
T/F When comparing GDP across countries, it is better to use comparisons based on common prices than simply one exchange rate conversions.
True
Which of the following counts as investment?
You buy a new house.
The lack of the bar over the L means thats it is:
an endogenous variable.
The relationship between pollution and per capita GDP is documented as:
an inverse U.
The production function Y=K1/3L2/3 describes how ________ can be combined to generate output.
any amount of capital and labor.
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.
Differences in output across economies with the same per capita capital stock can be explained by:
differences in total factor productivity.
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.
A production function exhibits constant returns to scale when you:
double each input-you double the output
A production function exhibits decreasing returns to scale when you:
double each input-you less than double the output
The rule of 70 states that if yt grows at a rate of g percent per year, then the number of years it takes yt to:
double is approximately equal to 70/g
Using the expenditure approach, consumption expenditures include household purchases of:
durable and nondurable good and services.
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.
The two main inputs we consider in a simple production function are:
capital and labor.
Consider an economy where the only consumption good is ice cream. Firms in this economy must:
choose how many workers to hire and how many ice cream machines to rent.
In the Solow model, it is assumed a _______ fraction of capital depreciates each period.
constant
In the Solow model, it is assumed that a _________ fraction of capital depreciates regardless of the capita stock.
constant
The Solow model assumes the saving rate is:
constant
T/F All else equal, a higher rate of depreciation, d(bar), increase the capital stock.
False
T/F 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
T/F In 1990, a country's per capita income was 2,000. By the year 2000, it was 3,000. The average annual growth rate was approximately 0.05.
False
T/F In the last 300 years, the standards of living between the richest and poorest countries have converged.
False
T/F When the price equals marginal cost, economic profits are positive.
False
T/F When the trade balance is negative, domestic producers are exporting more goods than are being imported.
False
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.
The marginal product of labor is defined as:
the additional output generated by hiring an additional unit of labor.
In the Solow model, the parameter d(bar) 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.
If MPK = r, the firm:
has the optimal amount of capital.
Both the United States and France, amount 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, the ________ plays a ________ role than it does in the standard production function model.
productivity parameter; larger
The Solow model of economic growth:
endogenizes physical capital.
If nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2?
$1,050
By how much does the 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
According to figure 3.7, the slowest growing country during 1960-2017 had a level of per capita GDP approximately equal to ______ of the U.S. level:
1/64
If population double every 35 years, then the growth rate of the population is
2%
If the population of Romania was about 22 million in 2010 and the average growth rate is 0.2 percent, then Romania's "initial" population was about _______ million in 1970
20.3
Which of the following is an exogenous variable in the Solow model?
All of these answers are correct.
Which of the following is/are essential for economic success?
All of these are correct.
Which of the following is a cost of economic growth?
All of these choices are correct.
The equation Y=K^aL^1-a is called the
Cobb-Douglas production function
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.
Which of the following does NOT increase the U.S. GDP?
The U.S. government increases social security payments.
Mathematically, an economic model is:
a set of equations.
If per capita GDP in 2014 was $900, in 2015 was $1,000 and in 2016 was $1,200, the growth rate of per capita GDP between 2014 and 2016 was:
about 33%
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.
In the Solow model, if It>d(bar)Kt, 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
A model is a _______ representation of _______ world that we use to study economic phenomena.
mathematical; the real
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 transisition dynamics can be summarized as:
the further below its steady state economy is, the fast the economy will grow.
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.