Midterm 2

Question 1

In the Solow growth model the saving rate determines the allocation of output between:

Answer 1

investment and consumption.

Question 2

Investment per worker (i) as a function of the saving ratio (s) and output per worker (f(k)) may be expressed as:

Answer 2

sf(k).

Question 3

The change in capital stock per worker (Δk) may be expressed as a function of s = the saving ratio, f(k) = output per worker, k = capital per worker, and δ = the depreciation rate, by the equation:

Answer 3

Δk = sf(k) – δk.

Question 4

The steady-state level of capital occurs when the change in the capital stock (Δk) equals:

Answer 4

0.

Question 5

In the steady state with no population growth or technological change, the capital stock does not change because investment equals:

Answer 5

depreciation.

Question 6

In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output will ______ until the steady state is attained.

Answer 6

increase; increase

Question 7

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is:

Answer 7

4.

Question 8

The number of effective workers takes into account the number of workers and the:

Answer 8

efficiency of each worker.

Question 9

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

Answer 9

the efficiency of labor.

Question 10

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

Answer 10

depreciating capital and capital for new efficiency units of labor.

Question 11

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 11

output per worker, capital per worker, consumption per worker

Question 12

In the Solow model with technological progress, the steady-state growth rate of output per (actual) worker is:

Answer 12

g.

Question 13

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 13

3

Question 14

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 14

increasing the saving rate

Question 15

In steady state, the capital-output ratio is equal to the savings rate divided by

Answer 15

The marginal product of capital (MPK).

Question 16

If the U.S. production function is Cobb–Douglas with capital share 0.3, growth in aggregate output 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 16

17.5 percent.

Question 17

Why is it difficult to explain cross-country income differentials without resorting to cross-county differences in productive efficiency?

Answer 17

The capital exponent (alpha) in the production function is too small.

Question 18

Which economist is typically associated with the “culture” school of international development?

Answer 18

Alberto Alesina

Question 19

The claim that the inability of colonial powers to establish thriving societies of new settlers in tropical colonies because of adverse climates is an important component of what school of international development?

Answer 19

The institutions school.

Question 20

Which of the following is NOT one of the basic cultural values discussed in class?

Answer 20

An unbiased court system.

Question 21

Cultures developed in parts of the world where plow (or plough) agriculture was common

Answer 21

Tend to have lower levels of female labor force participation, holding other factors equal.

Question 22

What is the central challenge in the study of how geography, institutions, and culture matter for the determination of output-per-worker in countries around the world?

Answer 22

Estabilishing directions of causality among economic outcomes and various geographic, institutional, and cultural variables.

Question 23

As discussed in Chapter 10, according to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

Answer 23

decreases.

Question 24

The aggregate demand curve tells us possible:

Answer 24

combinations of P and Y for a given value of M.

Question 25

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

Answer 25

between zero and one.

Question 26

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

Answer 26

actual expenditure equals planned expenditure.

Question 27

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

Answer 27

unplanned inventory investment.

Question 28

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y – T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

Answer 28

600.

Question 29

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

Answer 29

ΔG times [1 / (1-MPC)].

Question 30

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

Answer 30

changes income, which changes consumption, which further changes income.

Question 31

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.

Answer 31

$0.75 billion; more than $0.75 billion

Question 32

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income.

Answer 32

decreases; downward

Question 33

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

Answer 33

sell interest-earning assets in order to obtain non-interest-bearing money.

Question 34

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

Answer 34

increase; increase

Question 35

When the LM curve is drawn, the quantity that is held fixed is:

Answer 35

real money balances.

Question 36

An LM curve shows combinations of:

Answer 36

interest rates and income, which bring equilibrium in the market for real money balances.

Question 37

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

Answer 37

upward and to the left.

Question 38

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

Answer 38

goods and services; real money balances

Question 39

1. In the Solow Model, which of the following all grow at the same rate in steady state?

Answer 39

C.) The capital-output ratio K/Y, the marginal product of capital MPK, and k.

Question 40

2. Which of the following is the marginal product of labor MPL in the Solow Model?

Answer 40

A.) (1−α)YL.

Question 41

3. Assume that the growth rate of technological progress is zero. In this situation, which of the following remains constant in steady state?

Answer 41

A.) Output per worker Y/L. & B.) Consumption per worker C/L and thus the answer is C.) Both of the above.

Question 42

4. Consider an economy in steady state that has population growth n=.04, technological growth at rate g=.02, and a depreciation rate δ=.04. The savings rate is s=.40 and the production function is y=√k. What is the rate of growth of aggregate output Y in steady state?

Answer 42

C.) 6 percent (.06). Aggregate output grows at n + g in steady state.

Question 43

5. (Continuing the previous question.) What is the steady-state capital-output ratio K/Y?

Answer 43

D.) 4.

Question 44

6. (Continuing the previous question.) What is the steady-state growth rate of living standards C/L in this economy?

Answer 44

E.) The correct answer is g = .02, which is not one of the choices

Question 45

7. (Continuing the previous question.) What is the steady-state value of k?

Answer 45

D.) 16. See the section problem sets for how to determine k∗. Note that for this question, f(k) = k^α = √k= k^.5, so α = .5 = 1/2
.

Question 46

8. (Continuing the previous question.) Where is this economy relative to the Golden Rule level of k∗?

Answer 46

A. The economy’s k∗is below the Golden Rule level k∗^GR. (An easy way to see this is by noting that that the saving rate s = .40 is less than α = 1/2)

Question 47

9. Which of the following is true in any steady state k∗of the Solow Model?

Answer 47

A.) ∆k= 0. & B.)K/Y=s/(δ+n+g). thus D. Both A and B is the correct answer. Remember, MPK = δ + n + g only at the Golden Rule

Question 48

10. Crimsonia’s steady-state level of k∗is below the Golden Rule. Which of the following must also be true?

Answer 48

C. The savings rates in Crimsonia is smaller than capital’s share of output. [For choice A.), note that the MPK will be “too big” (that is, greater than δ + n + g) if the level of k∗ is below the Golden Rule level. For choice B.), remember that the growth rate of living standards is always equal to g, no matter what the level of steady-state k∗.]

Question 49

11. Assume than an economy’s population-growth rate increases. Which statistics decline as a result of this increase?

Answer 49

A.) The steady-state level of output per effective worker y.

Question 50

12. Which of the following events would be expected to have a permanent effect on the level of aggregate output Y in a country, relative to its steady state before the event occurred?

Answer 50

B.) A civil war that kills a discrete amount of labor L at a single point in time, but does not reduce K or change the long-run population-growth rate.