chapter 8

Question 1

The efficiency of labor is a term that does not reflect the:
Answer:

high output that comes from labor cooperating with a large amount of capital.

health of the labor force.

education of the labor force.

skills of the labor force acquired through on-the-job training.

Answer 1

high output that comes from labor cooperating with a large amount of capital.

Question 2

The efficiency of labor:
Answer
is the marginal product of labor.

is the rate of growth of the labor force.

includes the knowledge, health, and skills of labor.

equals output per worker.

Answer 2

includes the knowledge, health, and skills of labor

Question 3

The number of effective workers takes into account the number of workers and the:
Answer
amount of capital available to each worker.

rate of growth of the number of workers.

efficiency of each worker.

saving rate of each worker.

Answer 3

efficiency of each worker.

Question 4

The rate of labor-augmenting technological progress (g) is the growth rate of:
Answer
labor.

the efficiency of labor.

capital.

output.

Answer 4

the efficiency of labor.

Question 5

Assuming that technological progress increases the efficiency of labor at a constant rate is called:
Answer
endogenous technological progress.

the efficiency-wage model of economic growth.

labor-augmenting technological progress.

the Golden Rule model of economic growth.

Answer 5

labor-augmenting technological progress.

Question 6

If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then
the number of effective workers is growing at a rate of:
Answer
2 percent.
3 percent.
5 percent.
6 percent.

Answer 6

5 percent.

Question 7

Question
In a steady-state economy with a saving rate s, population growth n, and labor-augmenting technological progress g,
the formula for the steady-state ratio of capital per effective worker (k), in terms of output per effective worker (f(k)),
is (denoting the depreciation rate by #):
Answer
sf(k)/( # + n + g).
s/((f(k))(# + n + g)).
f(k)/((s)(# + n + g)).
(s – f(k))/(# + n + g).

Answer 7

sf(k)/( # + n + g).

Question 8

Question
In the Solow growth model with population growth and technological change, the break-even level of investment must
cover:
Answer 
depreciating capital.

depreciating capital and capital for new workers.

depreciating capital and capital for new effective workers.

depreciating capital, capital for new workers, and capital for new effective workers.

Answer 8

depreciating capital, capital for new workers, and capital for new effective workers.

Question 9

In the Solow growth model, the steady-state growth rate of output per effective worker is ______, and the steady-state
growth rate of output per actual worker is ______.

Answer
the sum of the rate of technological progress plus the rate of population growth; zero

zero; the rate of technological progress

zero; zero

the rate of technological progress; the rate of population growth

Answer 9

zero; the rate of technological progress

Question 10

In the Solow growth model with population growth and technological change, the steady-state growth rate of income
per person depends on:
Answer
the rate of population growth.

the saving rate.

the rate of technological progress.

the rate of population growth plus the rate of technological progress.

Answer 10

the rate of technological progress.

Question 11

In a steady-state economy with population growth n and labor-augmenting technological progress g, persistent
increases in standard of living are possible because the:
Answer
capital stock grows faster than does the labor force.

capital stock grows faster than does the number of effective workers.

capital stock grows faster than does depreciation.

saving rate constantly increases.

Answer 11

capital stock grows faster than does the labor force.

Question 12

According to the Solow model, persistently rising living standards can only be explained by:
Answer
population growth.

capital accumulation.

saving rates.

technological progress.

Answer 12

technological progress.

Question 13

In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:
Answer
output per worker.

output per effective worker.

consumption per worker.

consumption per effective worker.

Answer 13

consumption per effective worker.

Question 14

With population growth at rate n and labor-augmenting technological progress at rate g, the Golden Rule steady state
requires that the marginal product of capital (MPK):
Answer
net of depreciation be equal to n + g.

net of depreciation be equal to the depreciation rate plus n + g.

plus n be equal to the depreciation rate plus g.

plus g be equal to the depreciation rate plus n.

Answer 14

net of depreciation be equal to n + g.

Question 15

In the Solow model with technological progress, the steady-state growth rate of capital per effective worker is:
Answer
0.
g.
n.
n + g.

Answer 15

0.

Question 16

In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows
at a 3 percent rate, then in the steady state, output per effective worker grows at a ______ percent rate.
Answer
0
2
3
5

Answer 16

0

Question 17

Question
In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows
at a 3 percent rate, then in the steady state, output per actual worker grows at a \_\_\_\_\_\_ percent rate.
Answer
0
2
3
5

Answer 17

3

Question 18

Question
In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows
at a 3 percent rate, then in the steady state, total output grows at a \_\_\_\_\_\_ percent rate.
Answer 
0
2
3
5

Answer 18

5

Question 19

Question
In the Solow model with technological progress, the steady-state growth rate of output per effective worker is:
Answer 
0.
g.
n.
n + g.

Answer 19

0.

Question 20

Question
In the Solow model with technological progress, the steady-state growth rate of output per (actual) worker is:
Answer 
0.
g.
n.
n + g.

Answer 20

g.

Question 21

Question
In the Solow model with technological progress, the steady-state growth rate of total output is:
Answer 
0.
g.
n. 
n+g

Answer 21

n+g

Question 22

Question
In the Solow model with technological progress, by increasing the efficiency of labor at rate g:
Answer

the real wage and the real rental price of capital both grow at rate g.

the real wage grows at rate g but the real rental price of capital is constant.

the real wage is constant but the real rental price of capital grows at rate g.

both the real wage and the real rental price of capital are constant.

Answer 22

the real wage grows at rate g but the real rental price of capital is constant.

Question 23

The balanced-growth property of the Solow growth model with population growth and technological progress predicts
which of the following sets of variables will grow at the same rate in the steady state?
Answer
output per effective worker, capital per effective worker, real wage

output per worker, capital per worker, real wage

real rental price of capital, real wage, output per worker

capital-output ratio, output per worker, capital per worker

Answer 23

output per worker, capital per worker, real wage

Question 24

Question
The Solow model predicts that two economies will converge if the economies start with the same:
Answer 
capital stocks.
populations.
steady states.
production functions.

Answer 24

steady states.

Question 25

Conditional convergence occurs when economies converge to:
Answer
the same steady state as other economies.
the Golden Rule steady state.
the balanced-growth steady state.
their own, individual steady states.

Answer 25

their own, individual steady states.

Question 26

International data suggest that economies of countries with different steady states will converge to:
Answer
the same steady state.
their own steady state.
the Golden Rule steady state.
steady states below the Golden Rule level.

Answer 26

their own steady state.

Question 27

Question
If two economies are identical (including having the same saving rates, population growth rates, and efficiency of
labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy
with the smaller capital stock:
Answer
will be at a lower level than the steady state of the high capital economy.

will be at a higher level than the steady state of the high capital economy.

will be at the same level as the steady state of the high capital economy.

will be proportional to the ratio of the capital stocks in the two economies.

Answer 27

will be at the same level as the steady state of the high capital economy.

Question 28

If two economies are identical (with the same population growth rates and rates of technological progress), but one
economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower
saving rate:
Answer
will be at a lower level than the steady state of the
high-saving economy.

will be at a higher level than the steady state of the high-saving economy.

will be at the same level as the steady state of the high-saving economy.

will grow at a slower rate than the high-saving economy.

Answer 28

will be at a lower level than the steady state of the

high-saving economy.

Question 29

Question
Empirical investigations into whether differences in income per person are the result of differences in the quantities of
the factors of production available or differences in the efficiency with which the factors are employed typically find:
Answer
a negative correlation between the quantity of factors and the efficiency of use.

a positive correlation between the quantity of factors and the efficiency of use.

no correlation between the quantity of factors and the efficiency of use.

large gaps between the quantity of factors accumulated and the efficiency of use.

Answer 29

a positive correlation between the quantity of factors and the efficiency of use.

Question 30

Hypotheses to explain the positive correlation between factor accumulation and production efficiency include each of
the following except:
Answer
the quality of a nation’s institutions influences both factor accumulation and production efficiency.

capital accumulation causes greater production efficiency.

efficient economies make capital accumulation unnecessary.

an efficient economy encourages capital (including human capital) accumulation.

Answer 30

efficient economies make capital accumulation unnecessary.

Question 31

International differences in income per person in accounting terms must be attributed to differences in either ______
and/or ______.
Answer
factor accumulation; production efficiency
constant returns to scale; the marginal product of capital
unemployment rates; depreciation rates
consumption; interest rates

Answer 31

factor accumulation; production efficiency

Question 32

Question
Differences in factor accumulation and/or differences in production efficiency must account for all international
differences in:
Answer 
human capital and physical capital.
saving rates and population growth rates.
income per person.
labor efficiency.

Answer 32

income per person.

Question 33

The preponderance of empirical evidence supports the hypothesis that economies that are open to trade ______ than
comparable closed economies.
Answer
grow more rapidly

have lower steady-state levels of income per worker due to foreign competition

have faster rates of population growth and technological progress

converge more slowly to a steady-state equilibrium

Answer 33

grow more rapidly

Question 34

Empirical evidence supports the theory that free trade:
Answer
increases economic growth.

decreases economic growth.

increases imports, but decreases exports because of greater global competition.

increases both imports and exports, but does not contribute to overall economic growth.

Answer 34

increases economic growth.

Question 35

Question
If the marginal product of capital net of depreciation equals 8 percent, the rate of growth of population equals 2
percent, and the rate of labor-augmenting technical progress equals 2 percent, to reach the Golden Rule level of the
capital stock the ______ rate in this economy must be ______.
Answer
saving; increased
population growth; decreased
depreciation; decreased
total output growth; decreased

Answer 35

saving; increased

Question 36

If the marginal product of capital net of depreciation equals 10 percent and the rate of population growth equals 2
percent, then this economy will be at the Golden Rule steady state if the rate of technological progress equals _____
percent.

Answer 
0
2
8
10

Answer 36

8

Question 37

Which of the following changes would bring the U.S. capital stock, currently below the Golden Rule level, closer to the
steady-state, consumption-maximizing level?
Answer
increasing the population growth rate
increasing the rate of capital depreciation
increasing the rate of technological progress
increasing the saving rate

Answer 37

increasing the saving rate

Question 38

The analysis in Chapter 8 of the current capital stock in the United States versus the Golden Rule level of capital
stock shows that the capital stock in the United States is:
Answer
well above the Golden Rule level.
about equal to the Golden Rule level.
well below the Golden Rule level.
slightly above the Golden Rule level.

Answer 38

well below the Golden Rule level.

Question 39

Other things being equal, all of the following government policies are likely to increase national saving except:
Answer 
decreasing taxes on savings accounts.
running a budget deficit.
running a budget surplus.
retiring part of the national debt.

Answer 39

running a budget deficit.

Question 40

Question
Economic research shows that ______ in explaining international differences in living standards.
Answer
physical capital is more important than is human capital

human capital is at least as important as is physical capital

human capital is much more important than is physical capital

infrastructure is the most important factor

Answer 40

human capital is at least as important as is physical capital

Question 41

A possible externality associated with the process of accumulating new capital is that:
Answer
a reduction in labor productivity may occur.
new production processes may be devised.
old capital may be made more productive.
the government may need to adopt an industrial policy.

Answer 41

new production processes may be devised.

Question 42

The type of legal system in a country and the level of corruption in a country have been found to be:
Answer
unrelated to the rate of economic growth in a country.

significant determinants of the rate of economic growth in a country.

important topics for political discussion, but not economic explanations of growth.

important variables explaining the Golden Rule level of capital.

Answer 42

significant determinants of the rate of economic growth in a country.

Question 43

Question
Endogenous growth theory rejects the assumption of exogenous:
Answer 
production functions.
rates of depreciation.
population growth rates.
technological change.

Answer 43

technological change.

Question 44

In the Solow growth model, technological change is \_\_\_\_\_\_, whereas in endogenous growth theories, technological
change is \_\_\_\_\_\_.
Answer 
assumed; explained
explained; assumed
persistent; constant
constant; persistent

Answer 44

assumed; explained

Question 45

Question
In the Solow growth model, capital exhibits \_\_\_\_\_\_ returns. In a basic endogenous growth model, capital exhibits
\_\_\_\_\_\_ returns.
Answer 
constant; diminishing
constant; constant
diminishing; constant
diminishing; diminishing

Answer 45

diminishing; constant

Question 46

In the basic endogenous growth model, income can grow forever—even without exogenous technological progress
—because:
Answer
the saving rate equals the rate of depreciation.
the saving rate exceeds the rate of depreciation.
capital does not exhibit diminishing returns.
capital exhibits diminishing returns.

Answer 46

capital does not exhibit diminishing returns.

Question 47

The endogenous growth model's assumption of constant returns to capital is more plausible if capital is defined to
include:
Answer 
plant and equipment.
knowledge.
depreciation.
technology.

Answer 47

knowledge.

Question 48

Question
If Y is output, K is capital, u is the fraction of the labor force in universities, L is labor, and E is the stock of knowledge,
and the production Y = F(K,(1– u) EL) exhibits constant returns to scale, then output (Y) will double if:
Answer 
K is doubled.
K and u are doubled.
K and E are doubled.
L is doubled.

Answer 48

K and E are doubled.

Question 49

In the two-sector endogenous growth model, the saving rate (s) affects the steady-state:
Answer
level of income.
growth rate of income.
level of income and growth rate of income.
growth rate of the stock of knowledge.

Answer 49

level of income.

Question 50

In the two-sector endogenous growth model, the fraction of labor in universities (u) affects the steady-state:
Answer
level of income.

growth rate of income.

level of income and growth rate of income.

level of income, growth rate of income, and growth rate of the stock of knowledge.

Answer 50

level of income, growth rate of income, and growth rate of the stock of knowledge.

Question 51

Question
In the two-sector endogenous growth model, income growth persists because:

Answer
the production function shifts exogenously.

the saving rate exceeds the rate of depreciation.

the creation of knowledge in universities never slows down.

the fraction of the labor force in universities is large.

Answer 51

the creation of knowledge in universities never slows down.

Question 52

Question
In the two-sector endogenous growth model, the steady-state stock of physical capital is determined by ______ and
the growth in the stock of knowledge is determined by ______.
Answer
the fraction of labor in universities; the saving rate
the efficiency of labor; the saving rate
the production function; the efficiency of labor
the saving rate; the fraction of labor in universities

Answer 52

the saving rate; the fraction of labor in universities

Question 53

Empirical studies indicate that the rate of social return from positive “standing on shoulders” externalities of research
______ the negative “stepping on toes” externalities of research.
Answer
greatly exceed
approximately equal
are substantially less than
are only slightly less than

Answer 53

greatly exceed

Question 54

Empirical results justify substantial government subsidies to research based on the finding that the private return to
research is:
Answer
greater than the social return to research.
approximately equal to the social return to research.
less than the social return to research.
positive, but the social return to research is negative.

Answer 54

less than the social return to research.

Question 55

Question
Schumpeter’s thesis of “creative destruction” is an explanation of economic progress resulting from:
Answer
using up scarce natural resources to create new products.

breaking down barriers to trade and development.

new product producers driving incumbent producers out of business.

creating new methods to destroy the environment.

Answer 55

new product producers driving incumbent producers out of business.

Question 56

Question
=change in, When capital increases by K units, output increases by:
Answer 
L units.
MPL × L units.
K units.
MPK × K units.

Answer 56

MPK × K units.

Question 57

When capital increases by K units and labor increases by L units, output (Y) increases by:
Answer 
K + L units.
MPL + MPK units.
(MPK × K) + (MPL × L) units.
(MPL × K) + (MPK × K) units.

Answer 57

(MPK × K) + (MPL × L) units.

Question 58

If capital grows at 3 percent per year and labor grows at 1 percent per year, and capital's share is 1/3 while labor's
share is 2/3, if there is no technological progress and the neoclassical assumptions hold, the growth rate of output will
be:
Answer 
1-1/3 percent per year.
1-2/3 percent per year.
3 percent per year.
2-1/3 percent per year.

Answer 58

1-2/3 percent per year.

Question 59

Total factor productivity may be measured by:
Answer

subtracting the rate of growth of capital input and the rate of growth of labor input from the rate of growth
of output.

subtracting the rate of growth of capital input, multiplied by capital’s share of output, plus the rate of
growth of labor input, multiplied by labor’s share of output, from the rate of growth of output.

adding the rate of growth of capital input to the rate of growth of labor input.

adding the rate of growth of capital input, multiplied by capital’s share of output, to the rate of growth of
labor input, multiplied by labor’s share of output.

Answer 59

subtracting the rate of growth of capital input, multiplied by capital’s share of output, plus the rate of
growth of labor input, multiplied by labor’s share of output, from the rate of growth of output.

Question 60

Changes that can increase measured total factor productivity include:
Answer
increased expenditures on education.
regulations requiring reductions in pollution.
regulations requiring increases in worker safety.
increases in the capital-labor ratio.

Answer 60

increased expenditures on education.

Question 61

The Solow residual measures the portion of output growth that cannot be explained by growth in:
Answer 
capital and labor.
technology.
the money supply.
the saving rate.

Answer 61

capital and labor.

Question 62

Prescott interpreted fluctuations in the Solow residual as evidence that:
Answer

technology shocks are an important source of short-run economic fluctuations.

the Solow growth model does not converge to a steady-state equilibrium.

endogenous growth models are better explanations of growth than the Solow model.

the marginal product of labor fluctuates more than the marginal product of capital.

Answer 62

technology shocks are an important source of short-run economic fluctuations.

Question 63

An alternative to Prescott’s explanation of the cyclical behavior of the Solow residual is that it is the result of:
Answer

labor hoarding in recession and cyclical

mismeasurement of output.

bad weather, strict environmental regulations, and oil shocks.

declines in capital utilization and labor force participation.
technology shocks.

Answer 63

labor hoarding in recession and cyclical

Question 64

Question
Labor hoarding refers to:
Answer
keeping workers in low-wage jobs in order to reduce labor costs.

using less capital in production so that more workers will have jobs.

continuing to employ workers during a recession to ensure they will be available in the recovery.

contractually preventing workers from obtaining jobs with competing firms.

Answer 64

continuing to employ workers during a recession to ensure they will be available in the recovery.

Question 65

The Solow residual equals the percentage change in output:
Answer 
plus the percentage change in inputs.
minus the percentage change in prices.
minus the percentage change in inputs.
plus the percentage change in costs.

Answer 65

minus the percentage change in inputs.

Question 66

Question
The Solow residual will fall even if technology has not changed if there is:
Answer 
population growth.
endogenous growth.
labor hoarding.
balanced growth.

Answer 66

labor hoarding.

Question 67

Question
A recent study suggests that the spectacular growth rates experienced by Hong Kong, Singapore, South Korea, and
Taiwan are largely due to:
Answer 
rapid growth in total factor productivity.
increases in factor inputs.
high rates of saving.
low rates of capital depreciation.

Answer 67

increases in factor inputs.

Question 68

Question
If the production function is y = k
1/2, the steady-state value of y is:
Answer
y = ((s + g)/(# + n))1/2.
y = (s + g)/(# + n).
y = (2/(# + n + g))1/2.
y = s/(# + n + g).

Answer 68

y = s/(# + n + g).

Question 69

If the U.S. production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year,
depreciation is 4 percent per year, and the capital-output ratio is 2.5, the saving rate that is consistent with
steady-state growth is:
Answer 
12.5 percent.
14 percent.
17.5 percent.
20 percent.

Answer 69

17.5 percent.

Question 70

In a steady state with population growth and technological progress:
Answer
the capital share of income increases.

the labor share of income increases.

in some cases the capital share of income increases and sometimes the labor share increases.

the capital and labor shares of income are constant.

Answer 70

the capital and labor shares of income are constant.

Question 71

In a steady state with population growth and technological progress:
Answer
the real rental price of capital is constant and the real wage grows at the rate of technological progress.

the real rental price of capital grows at the rate of technological progress and the real wage is constant.

both the real rental price of capital and the real wage grow at the rate of technological progress.

both the real rental price of capital and the real wage are constant.

Answer 71

the real rental price of capital is constant and the real wage grows at the rate of technological progress.

Question 72

In comparing two countries with different levels of education but the same saving rate, rate of population growth, and
rate of technological progress, one would expect the more highly educated country to have:
Answer
a higher growth rate of total income and a higher real wage.

a higher growth rate of total income and the same real wage.

the same growth rate of total income and a higher real wage.

the same growth rate of total income and the same real wage.

Answer 72

the same growth rate of total income and a higher real wage.

Question 73

If the per-worker production function is y = Ak, where A is a positive constant, then the marginal product of capital:
Answer 
increases as k increases.
is constant as k increases.
decreases as k increases.
cannot be measured in this case.

Answer 73

is constant as k increases.

Question 74

Question
If the per-worker production function is y = Ak, where A is a positive constant, in the steady state, a:
Answer
lower saving rate does not affect the growth rate.
higher saving rate does not affect the growth rate.
lower saving rate leads to a higher growth rate.
higher saving rate leads to a higher growth rate.

Answer 74

higher saving rate leads to a higher growth rate.

Question 75

Question
If the production function is Y = AK2/3L1/3 in the land of Solovia, and the labor force increases by 5 percent while
capital is constant, labor productivity will:
Answer 
increase by 3.33 percent.
increase by 1.67 percent.
decrease by 1.67 percent.
decrease by 3.33 percent.

Answer 75

decrease by 3.33 percent.

Question 76

In year 1, capital stock was 6, labor input was 3, and output was 12. In year 2, capital was 7, labor was 4, and output
was 14. If shares of labor and capital were each 1/2, between the two years, total factor productivity:
Answer
increased by 1/12.
increased by 1/18.
decreased by 1/12.
decreased by 1/18.

Answer 76

decreased by 1/12.

Question 77

The rate of growth of labor productivity (Y/L) may be expressed as the rate of growth of total factor productivity:
Answer
plus the capital share multiplied by the rate of growth of the capital-labor ratio.

minus the capital share multiplied by the rate of growth of the capital-labor ratio.

plus the rate of growth of capital productivity.

minus the rate of growth of capital productivity.

Answer 77

plus the capital share multiplied by the rate of growth of the capital-labor ratio.

Question 78

Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3
percent, labor growing at 1 percent, and technological progress growing at 2 percent. The capital share is 0.3. The
growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:
Answer
0 percent, 1 percent, and 2 percent, respectively.
0.3 percent, 0.7 percent, and 2 percent, respectively.
0.9 percent, 0.7 percent, and 1.4 percent, respectively.
1.8 percent, 0.3 percent, and 0.9 percent, respectively.

Answer 78

0.9 percent, 0.7 percent, and 1.4 percent, respectively.