Chapter 10 practice questions

a poverty trap

Suppose that a very poor country finds itself in a situation where its citizens spend all of their time simply trying to survive by searching for food and shelter. As such, there are not resources available for education and infrastructure. This is situation is termed ____________________. A) the institutions hypothesis B) diminishing returns C) new growth theory D) a poverty trap

marked the beginning of significant economic growth in the world.

The Industrial Revolution A) produced goods exclusively using human or animal power. B) had no impact on standards of living in the world. C) marked the beginning of significant economic growth in the world.

nonexcludable

Patents and copyrights are meant to address the _____________ nature of knowledge capital. A) private good B) nonexcludable C) rival D) nonrival

output per worker.

Productivity is generally measured as: A) output per year. B) output per worker. C) real output over time. D) nominal output over time.

too little ; too little

Relative to the socially optimal levels, in a free market system individuals are likely to pursue _____________ education, and companies are likely to pursue _______________ research and development. A) too much ; too little B) too little ; too little C) too much ; too much D) too little ; too much E) the right amount of ; the right amount of

$2800

A small economy increased its capital per hour worked (K/L) from $10,000 to $20,000. As a result, real GDP per worker (Y/L) grew from $2000 to $2500. If the economy increases its capital per worker (K/L) even further to $30,000, then which of the following is most likely to be the new real GDP per worker (Y/L) (assuming that there is no change in technology)? A) $3000 B) $2200 C) $3500 D) $2800

Output per worker will increase by less than $5,000

A small economy increased its capital per hour worked (K/L) from $40,000 to $50,000. As a result, real GDP per worker (Y/L) grew from $20,000 to $25,000. If the economy increases its capital per hour worked from $50,000 to $60,000, but there is no change in technology, by how much more and in what direction will output per worker change? A) Output per worker will fall by more than $5,000. B) Output per worker will increase by more than $5,000. C) Output per worker will increase by exactly $5,000. D) Output per worker will increase by less than $5,000.

by more than $10,000.

A small economy increased its capital per hour worked (K/L) from $40,000 to $50,000. As a result, real GDP per worker (Y/L) grew from $20,000 to $25,000. If the economy wants to further increase its real GDP per worker (Y/L) to $30,000, by how much must it increase its capital per hour worked (K/L) (assuming that there is no change in technology)? A) by more than $10,000. B) by $10,000. C) by less than $10,000.

underinvest ; spillover to other firms

According to New Growth theory, relative to the socially optimal levels, firms will ______________ in knowledge capital because the benefits of this capital _______________ A) overinvest ; spillover to other firms B) overinvest ; are entirely captured to by the firm itself C) underinvest ; are entirely captured by the firm itself D) underinvest ; spillover to other firms

2.0%

According to the rule of 70, a country will double its real GDP per capita in 35 years if it grows at an average of ________ per year. A) 5.0% B) 7.0% C) 2.0% D) 3.5%

factory in Canada owned by a U.S. citizen.

An example of U.S. foreign direct investment would be a: A) factory in Japan owned by a Canadian citizen. B) factory in Canada owned by a U.S. citizen. C) factory in New Mexico owned by a Japanese citizen. D) All of these are examples of foreign direct investment.

a training session on Excel.

An example of human capital would be: A) a training session on Excel. B) an office chair. C) Excel software. D) All of these are examples of human capital.

All of the items are examples of physical capital.

An example of physical capital is: A) a factory. B) a pen. C) a computer. D) All of the items are examples of physical capital.

both countries to grow, but the rich country to grow more slowly than the poor country

Consider two countries alike in every other way, but one country is rich and full of capital and the other is poor and has very little capital. If the savings rate in each country is 5%, then we should expect ___________________. A) both countries to grow at the same rate B) both countries to grow, but the rich country to grow more slowly than the poor country C) the poor country to get richer and the rich country to get poorer D) the rich country to get richer and the poor country to get poorer

All of these are true.

For a country to acquire more physical capital it: A) must pay for the investment by reducing current consumption. B) faces the investment trade-off. C) must forgo current consumption. D) All of these are true.

about 10 years

If GDP is currently $13 trillion and is growing at a rate of 7% per year, how long will it take GDP to reach $26 trillion? A) about 7 years B) about 17 years C) about 14 years D) about 10 years

about 20 years

If GDP is currently $15 trillion and is growing at a rate of 3.5% per year, how long will it take GDP to reach $30 trillion? A) about 10 years B) about 20 years C) about 7 years D) about 14 years

entrepreneurs are unlikely to risk their own funds investing in such an economy.

If property rights are not enforced in a country, A) the market system will still work smoothly. B) that countryʹs growth rate will not be affected. C) entrepreneurs are unlikely to risk their own funds investing in such an economy. D) that country will grow more rapidly because of the reduction of law suits.

5%

If real GDP per capita for Econotopia grew from $20 trillion to $40 trillion between 2000 and 2014, then which of the following was the approximate annual growth rate? A) 10% B) 20% C) 5% D) 14%

2%

If real GDP per capita for Schruteland grew from $5 trillion to $10 trillion between 1980 and 2015, then which of the following was the approximate annual growth rate? A) 4% B) 6% C) 2% D) 35%

technological change.

If there is a change in the ability of a firm to produce a given level of output with a given level of inputs, we say there is A) diminishing returns. B) a movement along a given per-worker production function. C) human capital investment. D) technological change.

3%.

In a given year the nominal GDP growth rate is 10% with an inflation rate of 6% and population growth rate of 1%. Thus, the real growth rate of GDP per capita is: A) 5%. B) 17%. C) 3%. D) 7%.

3.8%.

In a given year the nominal growth rate is 7% with inflation and population growth rates of 2% and 1.2% respectively, then real growth rate of GDP per capita is: A) 3.8%. B) 5.0%. C) 7.0%. D) 5.8%.

investment ; savings

Other things equal, physical capital accumulation comes from _______________ spending, which is funded by ______________. A) investment ; savings B) discretionary; consumption C) investment ; consumption D) consumption ; investment

nonrival; nonexcludable; can

Knowledge capital is ________ and ________. As a result, firms ________ free ride on the efforts of other firms. A) nonrival; nonexcludable; cannot B) rival; nonexcludable; cannot C) nonrival; excludable; can D) nonrival; nonexcludable; can

two people can use the same knowledge to develop and produce a product.

Knowledge capital is nonrival in the sense that A) firms can benefit from the research and development of rival firms without paying for that benefit. B) no single company can be excluded from the benefits of new technologies. C) two people can use the same knowledge to develop and produce a product. D) firms do not compete to be the first to develop new technologies.

knowledge; increasing returns; economy

New growth theory states that increases in ________ capital will result in ________ at the ________ level. A) knowledge; increasing returns; economy B) knowledge; decreasing returns; economy C) knowledge; increasing returns; firm D) physical; increasing returns; firm E) More than one of the above is correct

knowledge; increasing returns; economy

New growth theory states that increases in ________ capital will result in ________ at the ________ level. A) knowledge; increasing returns; firm B) knowledge; decreasing returns; economy C) physical; increasing returns; economy D) knowledge; increasing returns; economy E) physical; increasing returns; firm

decreasing marginal returns

The convergence theory is based on the idea of: A) decreasing marginal returns. B) decreasing income per capita. C) increasing opportunity costs. D) increasing rates of income per capita.

All of these are true.

The convergence theory suggests: A) countries may have the same rate of growth but differing levels of income. B) all countries eventually will experience the same rate of growth. C) that poorer countries will grow faster than rich ones. D) All of these are true.

no sustained economic growth.

The period of time from 1,000 B.C. to 1700 A.D. was a period of: A) no sustained economic growth. B) slow and steady economic growth. C) moderate economic growth. D) rapid and sustained economic growth.

more difficult it is to pay for things that will bring it out of poverty.

The poorer a country is the: A) more difficult it is to pay for things that will bring it out of poverty. B) more they can invest in all the components of productivity at once. C) less they have to give up for the basic things that will bring them out of poverty. D) easier it is to pay for things that will bring it out of poverty.

3

The president of a poor country has announced that he will implement the following measures which he claims are designed to increase growth: 1. Reduce corruption in the legal system. 2. Reduce reliance on market forces because they allocate goods and services in an unfair manner. 3. Increase government support for vaccinations of children. 4. Encourage trade with neighboring countries. 5. Increase the fraction of GDP devoted to consumption by reducing the fraction devoted to investment. How many of these measures will likely have a positive effect on long-run growth? A) 1 B) 2 C) 3 D) 4 E) 5

1

The president of a poor country has announced that he will implement the following measures which he claims are designed to increase growth: 1. Reduce reliance on market forces because they allocate goods and services in an unfair manner. 2. Restrict investment in domestic industries by foreigners because they take some of the profits out of the country. 3. Discourage trade with neighboring countries in order to protect domestic industries. 4. Increase the fraction of GDP devoted to investment. How many of these measures will likely have a positive effect on long-run growth? A) 1 B) 2 C) 3 D) 4 E) 0 (None of these policies will have a positive effect on long-run growth)

2

The president of a poor country has announced that he will implement the following measures which he claims are designed to increase growth: 1. Reduce corruption in the legal system. 2. Reduce reliance on market forces because they allocate goods and services in an unfair manner. 3. Restrict investment in domestic industries by foreigners because they take some of the profits out of the country. 4. Encourage trade with neighboring countries. 5. Increase the fraction of GDP devoted to consumption by reducing the fraction devoted to investment. How many of these measures will likely have a positive effect on long-run growth? A)1 B)2 C)3 D)4 E)5

foreign direct investment.

The purchase of a factory by a corporation in a foreign country is called A) globally-directed investment. B) foreign direct investment. C) foreign capital depreciation. D) foreign portfolio investment.

labor productivity

The single most important determinant of long run economic growth is the growth rate of A) the money supply B) the average waist size of a countryʹs citizens C) the CPI D) labor productivity

bigger than the annual growth rate due to compounding.

Total changes in GDP over time are: A) bigger than the annual growth rate due to population growth. B) bigger than the annual growth rate due to compounding. C) smaller than the annual growth rate due to backsliding. D) smaller than the annual growth rate due to compounding.

2.75%

Using the growth accounting equation, if the growth rate of out is 5%, the growth of labor is 3% and the growth of capital is 2% then if α=0.75 then growth of technology can be estimated to be: A) 2.75%. B) 4.25%. C) 4.00%. D) 3.00%.

4.75%.

Using the growth accounting equation, if the growth rate of technology is 3%, the growth of labor is 2% and the growth of capital is 1% then if α = 0.25 then growth of output can be estimated to be: A) 4.75%. B) 4.00%. C) 6.00%. D) 4.25%.

More than one of the above is correct

We talked about the importance of ʺinstitutionsʺ for long-run economic growth. Which of the following statements about institutions is TRUE? A) Institutions place constraints on behavior. B) Institutions affect incentives. C) Institutions are determined by individuals as members of society. D) Institutions have a large impact on economic growth. E) More than one of the above is correct

the accumulated knowledge and skills that workers acquire from education, training, and their life experiences

What is human capital? A) buildings, equipment, and machinery owned by firms B) labor productivity C) buildings, equipment, and machinery owned by individuals rather than firms D) the accumulated knowledge and skills that workers acquire from education, training, and their life experiences

technological changes

Which of the following is most likely to produce sustained levels of economic growth in the long run? A) increases in physical capital B) technological changes

When one firm uses a piece of knowledge capital, then there is less knowledge capital available for other firms.

Which of the following statements concerning ʺknowledge capitalʺ is FALSE? A) Knowledge capital is likely to be under-provided by the market system. B) Knowledge capital is non-excludable (in the absence of government policy). C) When one firm uses a piece of knowledge capital, then there is less knowledge capital available for other firms. D) Knowledge capital can be described as ʺideasʺ which are useful in the production of goods and services. E) All of the above are FALSE

Knowledge capital is likely to be optimally-provided by the market system.

Which of the following statements concerning ʺknowledge capitalʺ is FALSE? A) Many firms can simultaneously use a piece of knowledge capital. B) Knowledge capital is non-excludable (in the absence of government policy). C) Knowledge capital is likely to be optimally-provided by the market system. D) Knowledge capital can be described as ʺideasʺ which are useful in the production of goods and services. E) All of the above are FALSE

Firms and individuals only consider their private benefits of acquiring education and knowledge capital and do not consider the benefits that other firms and individuals will experience from this acquisition.

Why are both education and knowledge capital likely to be under-provided (relative to the socially optimal level) in a market economy? A) Firms and individuals consider both their private benefits of acquiring education and knowledge capital and the benefits that other firms and individuals will experience from this acquisition. B) Firms and individuals only consider their private benefits of acquiring education and knowledge capital and do not consider the benefits that other firms and individuals will experience from this acquisition. C) Firms and individuals only consider their private costs of acquiring education and knowledge capital and do not consider the costs that other firms and individuals will experience from this acquisition. D) None of the above - Actually education and knowledge capital are likely to be provided at their socially optimal levels by a market economy.