6: Economic Growth

Question 1

Classical growth theory states that:
Real GDP/person reverts to:

Answer 1

Subsistence level

Question 2

Cost of capital relative to total factor cost=

Answer 2

Alpha

Question 3

A high value of alpha indicates:

Answer 3

that the next unit of capital added will increase output almost as much as the previous unit of capital

Developing nations w/ high alpha benefit from capital deepending

Question 4

Labor growth can be accomplished by an increase in:

Answer 4

Increase in:
* labor force participation rate
* average hours worked
* additional supply of labor by immigration
* population growth rate

Question 5

Removing trade barriers
&
Free capital flows
Would have what impact on convergence?

Answer 5

Convergence of living standards is likely to be quicker in an open economy

Question 6

Absolute convergence states that:
per capita growth rates will converge between

growth rates, not growth level

Answer 6

developing & developed countries, regardless of characterstics

Question 7

Conditional convergence assumes that:
convergence of living standards (level of per capita output) will only occur for countries with:

Answer 7

same
savings rate,
population growth,
& production functions

Question 8

Club convergence states that:
living standards of developing countries will converge to living standards of developed only if:

Answer 8

They are in the same “club”
Club: countries with similar institutional structures

only for countries already in the rich and middle income “club”

Question 9

Neoclassical growth theory states that:
Sustainable growth rate is a function of:

Answer 9

population growth
labor’s share of income
rate of tech advancement

Question 10

Endogeneous growth theory states that:
investment in capital can:

Answer 10

have constant returns

Question 11

Determines how efficiently the labor can be combined with capital to produce output

Answer 11

Total Factor Productivity (TFP)

Question 12

In the long run, the rate of aggregate stock market appreciation is limited to:

Answer 12

the sustainable growth rate of economy

Question 13

Higher potential GDP has what impact on equity & fixed income investments?

Answer 13

increases potential for stock returns
&
increases the credit quality of fixed income

Question 14

Inflation is unlikely when:
Actual GDP vs Potential GDP

Answer 14

Actual < Potential

Expansionary Monetary & Fiscal policy is likely

Question 15

Selection effect refers to the increased competition from foreign companies, which forces…

Answer 15

less efficient domestic companies to exit and more efficient ones to innovate and raises the efficiency of the overall national economy

Endogeneous: Open trade policy would cause this effect

Question 16

Scale effects allows producers to more fully exploit economies of scale by:

Answer 16

selling to a larger market

Endogeneous: Open trade policy would cause this effect

Question 17

Backwardness effect arises from less advanced countries/sectors catching up with more advanced, through:

Answer 17

spillovers

Endogeneous: Open trade policy would cause this effect

Question 18

TFP reflects the general level of:

Answer 18

productivity or technology in the economy

Question 19

Neoclassical model

When
Marging Product of Capital = marginal cost of capital, profit maximizing producers will stop:

Answer 19

adding capital (stop increasing capital/labor ratio)

Question 20

For neoclassical model, capital deepening can raise the per capita growth when:

Answer 20

MPK > r

Question 21

Neoclassical model states that more rapid capital accumulation (higher rates of investment), will:

Answer 21

NOT result in permanently higher rate of per capita growth

Question 22

When neoclassical is at steady state (MPK=r), growth rate in productivity depends on:

Answer 22

Technology