Chapter 25.2

Question 1

Consider the long-run theory of investment, saving and growth. In the long-run version of our macro model (with real GDP equal to Y*), the equilibrium interest rate is determined where
A) aggregate demand equals aggregate expenditure.
B) desired national saving equals desired investment.
C) the nominal price level equals the real price level.
D) desired consumption equals desired investment.
E) desired saving equals desired consumption.

Answer 1

B

Question 2

If government policies are to be successful in enhancing a country’s long-run growth rate, they likely work through generating
A) higher levels of current consumption.
B) greater private investment in physical and human capital.
C) an increase in current consumption and a reduction in saving.
D) a leftward shift in the AS curve.
E) fiscal policies that shift the AD curve to the right.

Answer 2

B

Question 3

Consider a closed economy with real GDP in the long run of $400, consumption expenditures of $250, government purchases of $75, and net tax revenue of $20. What is the level of national saving?
A) $55
B) $75
C) $95
D) $225
E) $230

Answer 3

B

Question 4

Which of the following equations is a correct expression for national saving in the long run when real GDP equals potential output?
A) NS = Y* - C - G
B) NS = Y* - C + T - G
C) NS = Y* - T - C
D) NS = T - G
E) NS = T - G - C

Answer 4

A

Question 5

Refer to Table 25-2. What is the level of private saving for this economy? 
A) $50 
B) $100 
C) $150 
D) $400
E) $450

Answer 5

D

Question 6

Refer to Table 25-2. What is the level of public saving for this economy? 
A) -$200 
B) -$150 
C) -$50 
D) $150 
E) $200

Answer 6

B

Question 7

Refer to Table 25-2. What is the level of national saving for this economy? 
A) -$200 
B) -$150 
C) -$50 
D) $150 
E) $250

Answer 7

E

Question 8

Refer to Table 25-3. What is the level of private saving for this economy? 
A) $50 
B) $100 
C) $500
D) $2000
E) $3000

Answer 8

C

Question 9

Refer to Table 25-3. What is the level of public saving for this economy? 
A) -$200 
B) -$100 
C) $200
D) $300
E) $500

Answer 9

A

Question 10

Refer to Table 25-3. What is the level of national saving for this economy? 
A) $50 
B) $100 
C) $200
D) $250
E) $300

Answer 10

E

Question 11

Refer to Table 25-3. What is the level of combined budget surpluses of all levels of government in this economy? 
A) $50 
B) $100 
C) $500
D)  -$200
E) -$500

Answer 11

D

Question 12

Suppose the government has a budget deficit of $400. If the country's level of national saving is $200, then private saving must be 
A) -$400. 
B) $200. 
C) $400. 
D) $600. 
E) $800.

Answer 12

D

Question 13

Suppose the government has a budget surplus of $2 billion. If the country's level of private saving is $1.2 billion, then national saving must be
A) -$1.2 billion.
B) -$800 million.
C) $0.
D) $800 million
E) $3.2 billion

Answer 13

E

Question 14

Consider the long-run theory of investment, saving, and growth. For a given level of private saving, an increase in government purchases will likely \_\_\_\_\_\_\_\_ the economy's long-run growth rate.
A) slow down
B) accelerate
C) not affect
D) increase
E) Not enough information to know

Answer 14

A

Question 15

For a given level of national income, an increase in private consumption or government purchases will cause national saving to
A) increase.
B) grow at a constant rate.
C) remain unchanged from its initial level.
D) exceed investment.
E) decrease.

Answer 15

E

Question 16

An increase in the government budget surplus, everything else constant, will cause a(n)
A) decrease in national saving.
B) increase in national saving.
C) decrease in the growth rate.
D) equal increase in private consumption.
E) equal decrease in private investment.

Answer 16

B

Question 17

Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have
A) a high growth rate because aggregate expenditure will be high out of any given income.
B) either a high or low growth rate depending on the investment schedule.
C) an AS curve moving continually to the right.
D) trouble achieving potential real national income in the short run.
E) a low growth rate because sustained high investment is not possible with low saving.

Answer 17

E

Question 18

Consider the market for financial capital for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have
A) a high growth rate because aggregate expenditure will be high out of any given income.
B) a high growth rate because sustained high investment is possible with high saving.
C) an AS curve moving continually to the left.
D) trouble achieving potential real national income in the short run.
E) either a high or low growth rate depending on the investment demand schedule.

Answer 18

B

Question 19

Which of the following statements concerning national saving is true?
A) A country’s saving rate is unrelated to its growth rate.
B) An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short-run and a long-run decrease in national income.
C) An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long-run.
D) An increase in the rate of saving will always be offset by a reduction in private investment.
E) An increase in the rate of saving will lead to a short-run reduction in national income, but to higher economic growth in the long run.

Answer 19

E

Question 20

For a given level of national income, a decrease in government tax revenues will cause
A) a decrease in national saving.
B) an increase in national saving.
C) an increase in the growth rate.
D) no effect on national saving.
E) a decrease in consumption.

Answer 20

A

Question 21

Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to
A) increase and the flow of national saving to decrease.
B) increase and the flow of investment to increase.
C) increase and the flow of investment to decrease.
D) decrease and the flow of national saving to increase.
E) decrease and the flow of national saving to decrease.

Answer 21

D

Question 22

Consider the long-run theory of investment, saving and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to
A) increase and the flow of national saving to fall.
B) increase and the flow of investment to increase.
C) increase and the flow of investment to decrease.
D) decrease and the flow of investment to decrease.
E) decrease and the flow of investment to increase.

Answer 22

E

Question 23

Consider the market for financial capital in the long run. The national saving curve is upward sloping because an increase in the real interest rate
A) leads households to increase their current consumption.
B) leads to an increase in investment demand.
C) decreases the supply of public saving.
D) leads households to reduce their current consumption.
E) decreases the supply of private saving.

Answer 23

D

Question 24

Consider the market for financial capital in the long run. The investment demand curve is downward sloping because
A) an increase in the real interest rate leads to an increase in investment demand.
B) all components of desired investment are negatively related to the real interest rate.
C) all components of desired investment are positively related to the real interest rate.
D) a decrease in the real interest rate reflects a higher opportunity cost to firms of using financial capital.
E) an increase in the real interest rate reflects a lower opportunity cost to firms of using financial capital.

Answer 24

B

Question 25

Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i1, there is ________ which will drive the interest rate down until it reaches i*.
A) an excess demand for financial capital
B) an excess demand for investment
C) an excess supply of financial capital
D) an excess supply of public saving

Answer 25

C

Question 26

Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i4, there is ________, which will drive the real interest rate up to i*.
A) an excess demand for financial capital
B) an excess supply of financial capital
C) an excess supply of saving
D) an excess demand for public saving

Answer 26

A

Question 27

Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases (G). What is likely to happen in this market for financial capital?
A) There is no effect on NS or ID, and the interest rate remains at i*.
B) National saving shifts to NS1 and the interest rate falls to i3.
C) Investment demand shifts to I1D, and the interest rate rises to i2.
D) The real interest rate rises because of the decrease in the budget surplus.
E) The real interest rate falls because of the decrease in the budget surplus.

Answer 27

B

Question 28

Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases. What is the effect on investment demand?
A) National saving shifts to NS1, causing an increase in the quantity of investment demanded from I* to I2.
B) There is no effect on NS or ID, and the quantity of investment demanded remains at I.
C) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I to I1.
D) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I3.
E) National saving shifts to NS1, and investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I3.

Answer 28

A

Question 29

Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the real interest rate?
A) There is no effect on NS or ID, and the interest rate remains at i*.
B) National saving shifts to NS1, and the real interest rate falls to i3.
C) The real interest rate rises because of the decrease in the budget surplus.
D) The real interest rate falls because of the decrease in the budget surplus.
E) Investment demand shifts to I1D, and the real interest rate rises to i2.

Answer 29

E

Question 30

Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the quantity of national saving?
A) There is no effect on NS or ID and the quantity of national saving supplied remains at I*.
B) National saving shifts to , and the quantity of national saving supplied rises to I2.
C) Investment demand shifts to I1D and the quantity of national saving supplied rises to I1.
D) Investment demand shifts to I1D, national saving shifts to NS1, and the quantity of national saving rises to I3.
E) National saving shifts to , investment demand shifts to I1D, and the quantity of national saving rises to .

Answer 30

C

Question 31

Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 2%. In this case there is an excess \_\_\_\_\_\_\_\_ financial capital of \_\_\_\_\_\_\_\_ billion dollars.
A) supply of; 30
B) demand for; -30
C) supply of; 50
D) demand for; 30
E) demand for; 80

Answer 31

D

Question 32

Refer to Figure 25-3. The equilibrium interest rate in this market is \_\_\_\_\_\_\_\_% and the equilibrium flow of investment and saving is \_\_\_\_\_\_\_\_ billion dollars.
A) 1; 50
B) 2; 60
C) 3; 70
D) 4; 80
E) 5; 90

Answer 32

C

Question 33

Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 4%. In this case there is an excess \_\_\_\_\_\_\_\_ financial capital of \_\_\_\_\_\_\_\_ billion dollars.
A) supply of; 30
B) demand for; -60
C) supply of; 90
D) demand for; 30
E) demand for; 60

Answer 33

A

Question 34

) In the long run, an increase in the demand for investment pushes \_\_\_\_\_\_\_\_ the real interest rate, encourages \_\_\_\_\_\_\_\_ saving by households, and leads to a \_\_\_\_\_\_\_\_ future growth rate of potential output.
A) down; less; lower
B) up; less; lower
C) down; less; higher
D) up; more; higher
E) up; more; lower

Answer 34

D

Question 35

Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries
A) with the highest levels of per capita GDP.
B) with the highest levels of GDP.
C) with high rates of economic growth.
D) with the lowest rate of national saving.
E) with a negative relationship between investment and the rate of economic growth.

Answer 35

C

Question 36

Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is
A) an increase in per capita national income.
B) an increasingly aging population.
C) a decrease in per capita output.
D) a decrease in the capital-output ratio.
E) an inward shift of the production possibilities boundary.

Answer 36

C

Question 37

One important assumption of the Neoclassical growth model is that, with a given state of technology,
A) increases in the use of a single factor bring increasing returns.
B) increases in the use of a single factor result in constant returns.
C) increases in the use of single factor bring diminishing returns.
D) the return from successive units of a single factor increases over time.
E) increases in GDP are possible only if all factors are increased at an equal rate.

Answer 37

C

Question 38

The main properties of a Neoclassical aggregate production function are ________ when all factors are increased proportionally and ________ when any one factor is increased on its own.
A) increasing returns to scale; diminishing marginal returns
B) constant returns to scale; diminishing marginal returns
C) constant returns to scale; constant marginal returns
D) decreasing returns to scale; diminishing marginal returns
E) increasing returns to scale; increasing marginal returns

Answer 38

B

Question 39

The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually
A) increase the average product of the factor.
B) decrease the average product of the factor.
C) lead to an increase in the marginal output of the factor.
D) lead to a decrease in total output by the factor.
E) lead to an increase in the material standard of living.

Answer 39

B

Question 40

The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the
A) average product of the factor to increase.
B) marginal product of the factor to fall.
C) marginal product of the factor to increase at an increasing rate.
D) marginal product of the factor to increase but at a decreasing rate.
E) material standard of living to increase.

Answer 40

B

Question 41

A central assumption of the Neoclassical growth model is that
A) long-run growth arises from correcting market failures.
B) long-run growth arises only from technological innovation.
C) there are diminishing marginal returns to a single factor.
D) there are constant marginal returns to investment.
E) there are increasing marginal returns to capital investment.

Answer 41

C

Question 42

In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by
A) decreasing GDP and falling living standards.
B) decreasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) increasing GDP and constant living standards.
E) increasing GDP and increasing living standards.

Answer 42

C

Question 43

In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in
A) decreasing GDP and falling living standards.
B) decreasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) increasing GDP and increasing living standards.
E) increasing savings and increasing living standards.

Answer 43

B

Question 44

In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to
A) decreasing GDP and falling living standards.
B) decreasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) increasing GDP and increasing living standards.
E) increasing GDP and decreased national wealth.

Answer 44

D

Question 45

In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe
A) rising GDP but falling living standards.
B) rising GDP but no change in living standards.
C) rising GDP and increasing living standards.
D) increasing living standards but only for workers using labour-intensive production.
E) increasing living standards but only for workers using capital-intensive production.

Answer 45

B

Question 46

According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of
A) a fast-growing capital stock.
B) a better educated labour force.
C) an increase in the working population.
D) a growing capacity to develop and incorporate new innovations.
E) an increase in the availability of natural resources.

Answer 46

C

Question 47

In Neoclassical growth theory, an increase in the labour force \_\_\_\_\_\_\_\_ total output and \_\_\_\_\_\_\_\_ total output per person.
A) increases; increases
B) increases; leaves constant
C) increases; reduces
D) leaves constant; leaves constant
E) leaves constant; reduces

Answer 47

C

Question 48

In Neoclassical growth theory, average material living standards in an economy could fall when
A) additional units of capital are added to the other factors.
B) additional units of labour are added to the other factors.
C) there is equal percentage growth in capital and labour inputs.
D) technology improves.
E) there is a decline in the population.

Answer 48

B

Question 49

In Neoclassical growth theory, increasing the amount of capital employed in production ________ the average standard of living as long as the marginal product of capital exceeds zero.
A) unambiguously raises
B) unambiguously reduces
C) has no effect on
D) at first raises but eventually reduces
E) at first reduces but eventually raises

Answer 49

A

Question 50

The Neoclassical theory of economic growth led economics to be referred to as the “dismal science.” The explanation for this reference lies in the theory’s emphasis on
A) growing inequality of income.
B) increasing government intervention in the economy.
C) increasing damage to the environment.
D) the immoral behaviour of firms.
E) diminishing returns in production.

Answer 50

E

Question 51

In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever
A) larger decreases in GDP and large decreases in living standards.
B) larger increases in GDP but smaller decreases in living standards.
C) smaller increases in GDP and living standards.
D) larger levels of unemployment but small increases in the standard of living.
E) larger levels of unemployment but larger increases in the standard of living.

Answer 51

C

Question 52

According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards?
A) an increase in population
B) a decrease in unemployment rates
C) an increase in the stock of physical capital
D) an equal increase in both population and the stock of capital
E) an equal increase in both population and output

Answer 52

C

Question 53

According to the Neoclassical growth model, which of the following scenarios (other things being equal) explains progressively smaller increases in per capita GDP?
A) an increasing population
B) decreasing unemployment rates
C) an increasing capital stock
D) equal increases in both population and the stock of capital
E) equal increases in population and output

Answer 53

C

Question 54

Real GDP is not a good measure of average material living standards because
A) it is biased by the changes in the inflation rate.
B) it excludes the role of imported goods.
C) it does not take into account the size of the population.
D) it is sensitive to the base year chosen in its calculation.
E) the price level may be changing, which affects what people can afford to buy.

Answer 54

C

Question 55

Balanced growth of labour and capital in the Neoclassical growth model
A) leads to rising material living standards.
B) will not increase the level of per capita GDP.
C) will result in a constant level of GDP.
D) is a natural outcome of long-run equilibrium.
E) explains current rising per capita incomes in many countries.

Answer 55

B

Question 56

According to the Neoclassical growth theory, sustained rising material living standards can only be explained by
A) growth in human capital.
B) growth in physical capital.
C) growth in the labour force.
D) balanced growth of labour and capital.
E) exogenous technological change.

Answer 56

E

Question 57

The aggregate production function shows the \_\_\_\_\_\_\_\_ for given levels of labour and capital inputs.
A) marginal product of labour
B) marginal product of capital
C) returns to scale
D) total output for society (real GDP)
E) the production possibilities boundary

Answer 57

D

Question 58

Neoclassical growth theory is based on the assumption of \_\_\_\_\_\_\_\_ marginal returns to a single factor and \_\_\_\_\_\_\_\_ returns to scale exhibited by the aggregate production function.
A) decreasing; constant
B) decreasing; decreasing
C) constant; decreasing
D) increasing; increasing
E) increasing; constant

Answer 58

A

Question 59

An aggregate production function exhibits constant returns to scale when a 1% increase in labour input
A) produces a 1% increase in output.
B) along with a 1% increase in capital produces the same amount of output.
C) along with a 1% increase in capital produces 1% more output.
D) along with a 1% decrease in capital produces the same amount of output.
E) induces a 1% increase in capital input.

Answer 59

C

Question 60

An aggregate production function exhibits increasing returns to capital when
A) no change in capital produces a 1% increase in output.
B) a 1% decrease in capital produces an increase in the marginal product of capital.
C) a 1% increase in capital produces no change in output.
D) each additional unit of capital increases the number of jobs by more than 1%.
E) each additional unit of capital has a higher marginal product than the previous unit.

Answer 60

E

Question 61

Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each and total output (Y) increases by 5% as a result, then this production function is displaying
A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) diminishing marginal returns.
E) a change in technology.

Answer 61

B

Question 62

Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each, and the production function displays constant returns to scale, then total output will increase by \_\_\_\_\_\_\_\_%. 
A) 0
B) less than 5
C) 5
D) more than 5
E) Not enough information to determine

Answer 62

C

Question 63

Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then
A) each additional unit of labour will add less to total output than the previous unit of labour.
B) each additional unit of labour will add more to total output than the previous unit of labour.
C) total output increases in proportion to the increases in labour.
D) there are increasing returns to scale.
E) there are constant returns to scale.

Answer 63

A

Question 64

Refer to Table 25-4. The production function that applies to Economies A, B, and C displays
A) increasing returns to scale.
B) increasing marginal returns to labour.
C) diminishing marginal returns to labour.
D) constant returns to scale.
E) Both C and D are correct.

Answer 64

E

Question 65

Refer to Table 25-4. Diminishing marginal returns to labour is most evident in the data shown for 
A) Economy A.
B) Economy B.
C) Economy C.
D) Economies B and C, but not A.

Answer 65

A

Question 66

Refer to Table 25-4. Consider the changes shown for L, K, and T for Economy A, where output (Y) is the economy’s real GDP. As total labour input rises, this economy will show
A) rising GDP and rising per capita GDP.
B) rising GDP but falling per capita GDP.
C) rising per capita GDP and output rising faster than capital.
D) GDP rising more slowly than capital but per capita GDP falling.
E) declining GDP and declining per capita GDP.

Answer 66

B

Question 67

Refer to Table 25-4. Consider the changes shown for L, K, and T for Economy B, where output (Y) is the economy’s real GDP. As total labour and capital inputs rise, this economy will show
A) rising GDP but falling per capita GDP.
B) rising GDP and rising per capita GDP.
C) rising GDP but constant GDP per capita.
D) GDP rising faster than capital.
E) GDP rising more slowly than capital.

Answer 67

C

Question 68

Refer to Table 25-4. Consider the changes shown for L, K, and T for Economy C, where output (Y) is the economy’s real GDP. As total labour and capital inputs rise, this economy will show
A) rising GDP but falling per capita GDP.
B) rising GDP and rising per capita GDP.
C) rising GDP but constant GDP per capita.
D) GDP rising more slowly than labour.
E) GDP rising more slowly than capital.

Answer 68

B

Question 69

“Embodied technical change” is said to occur when
A) older capital equipment is replaced with different, more productive, capital.
B) the capital-labour ratio is increasing.
C) innovations in the organization of production take place which do not involve changes in the form of capital used.
D) techniques of managerial control are improved.
E) the labour force acquires new skills that can be used across a wide range of industries.

Answer 69

A

Question 70

Consider the Neoclassical growth model. Sustained economic growth in the long run could best be fostered by
A) expansionary fiscal policy.
B) decreasing excise taxes on consumer goods.
C) technological improvements embodied in physical or human capital.
D) elimination of an output gap.
E) expansionary monetary policy.

Answer 70

C

Question 71

When a new personal computer is purchased to replace an old one, and the new PC is much better and faster than the old one, there has been
A) a disembodied technical change.
B) a rise in the capital-output ratio.
C) a fall in the output per unit of capital.
D) an embodied technical change.
E) capital “deepening.”

Answer 71

D

Question 72

If a country experiences growth in “total factor productivity” (i.e., the “Solow residual”), then
A) all growth in real GDP can be explained by growth in the labour force.
B) all growth in real GDP can be explained by growth in the capital stock.
C) there is some growth in real GDP that cannot be accounted for by growth in capital or the labour force.
D) none of the growth in real GDP can be accounted for by growth in capital and the labour force.
E) material standards of living are falling.

Answer 72

C

Question 73

The growth of “total factor productivity,” or the “Solow residual,” is equal to the growth in real GDP
A) accounted for by changes in all factors of production but excluding technological changes.
B) accounted for by changes in all factors of production and including technological changes.
C) that cannot be accounted for by changes in the quantities of labour and capital.
D) that cannot be accounted for by changes in technology.
E) that cannot be accounted for by changes in the labour force.

Answer 73

C

Question 74

An example of “embodied technical change” is
A) education that teaches a wider portion of the labour force basic numeracy.
B) the strengthening of social infrastructure, such as delivery of basic health-care services.
C) better methods of inventory control.
D) the development of better intellectual property law.
E) the replacement of old computer chips with new ones designed for faster processing.

Answer 74

E

Question 75

The Solow residual is an estimate of changes in
A) economic growth.
B) human capital.
C) physical capital.
D) labour.
E) technology.

Answer 75

E