Practice Problems: Chapter 9 Long-Run Economic Growth

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1 Practice Problems: Chapter 9 Long-Run Economic Growth 1. Which of the following is a chief measure of economic growth over time? A) Inflation B) increases in real per capita GDP C) decline in real interest rates D) increases in the available labor supply 2. The best currently available measure of the standard of living in a country is: A) the nominal GDP per capita. B) the real GDP per capita. C) the unemployment rate. D) the growth rate of productivity. 3. Today more than of the world's population lives in countries poorer than the United States was in A) one fifth B) one third C) one half D) two fifths 4. The rule of 70 states that: A) the average score on standardized tests is normally distributed with a mean of 70 and a standard deviation of 10. B) everyone should retire by age 70. C) the number of years for a variable to double equals 70 divided by its annual growth rate. D) Social Security benefits should increase when people reach To find the approximate number of years it takes the economy to double, one would: A) divide its growth rate by 70. B) divide 70 by its growth rate. C) divide its growth rate by 100. D) multiply its growth rate by 20.

2 6. According to the rule of 70, if a country doubles its level of real GDP per capita every 35 years, that country must be growing at a rate of: A) 2%. B) 3.5%. C) 35%. D) 70%. 7. Assume two countries on a peninsula. The first has real GDP per capita growth rate of 2% and its neighbor to the south is growing at 5%. How much more quickly in years will the country in the south double its GDP per capita compared to its neighbor in the north? A) 5 years B) 10 years C) 15 years D) 21 years 8. Long-run economic growth depends almost entirely on: A) labor productivity growth. B) population growth. C) agricultural production growth. D) number of hours worked. 9. An example of physical capital would be: A) a truck a company purchases for work. B) a worker who physically learns to work on a truck his company buys. C) a truck a worker buys for personal use like hunting, going to work, or going to the beach. D) all of the above. 10. Human capital is: A) the improvement in labor created by education and knowledge that is embodied in the work force. B) the machinery and tools that each individual worker owns. C) robots that can perform tasks that only humans could do in the past. D) all of the above.

3 11. Technological progress allows workers to produce more: A) because it increases the amount of physical capital available. B) because it increases the amount of human capital available. C) even when the amount of physical capital and human capital do not change. D) only if the amount of physical capital grows at the same rate. 12. For developed countries, which of the following would be considered the most important drive in productivity growth? A) educational level of attainment B) the amount of physical capital C) Technology D) the abundance of natural resources 13. The aggregate production function is expressed as Y/L = F(K/L, H/L, T). Which of the following is represented by K/L? A) output per worker B) capital per worker C) Technology D) real GDP per worker 14. The aggregate production function exhibits: A) diminishing returns to physical capital. B) constant returns to physical capital. C) increasing returns to physical capital. D) negative returns to physical capital. 15. Diminishing returns to physical capital means that, when the amount of human capital per worker and the state of technology are held fixed, each increase in the amount of physical capital per worker leads to: A) a smaller increase in productivity. B) a decrease in productivity. C) negative productivity. D) losses for stockholders. 16. Diminishing returns to physical capital means that as more and more physical capital is combined with a fixed amount of human capital with a fixed technology, eventually: A) aggregate output or real GDP declines. B) aggregate output or real GDP grows. C) additions to aggregate output or real GDP declines. D) additions to aggregate output or real GDP increases.

4 Use the following to answer questions 17-19: Exhibit: Aggregate Production Function The economy of Brittania has 2,000 workers and has estimated its aggregate production function, when holding human capital per worker and technology constant, as where Y is real GDP, L is the number of workers, and K is the quantity of physical capital. 17. (Exhibit: Aggregate Production Function) When the quantity of physical capital per worker equals $25, what is real GDP per worker? A) $200 B) $500 C) $1,000 D) $5, (Exhibit: Aggregate Production Function) When the quantity of physical capital per worker equals $49, what is real GDP per worker? A) $200 B) $700 C) $1,400 D) $3, (Exhibit: Aggregate Production Function) When the quantity of physical capital per worker almost doubles from $25 to $49, real GDP per worker increases by, illustrating that the aggregate production function experiences returns. A) almost doubles; constant B) 40%; diminishing C) 400%; increasing D) None of the above is correct.

5 Use the following to answer questions 20-23: Figure: Technological Progress and Productivity Growth 20. (Figure: Technological Progress and Productivity Growth) If there is an increase in physical capital per worker (all other factors remaining unchanged), then this is best indicated by a move from: A) A to B. B) B to A. C) C to B. D) B to C. 21. (Figure: Technological Progress and Productivity Growth) Which of the following moves would be most likely to result from an increase in the quality (as well as quantity) of government spending on education? A) A to B B) B to A C) B to C D) C to B

6 22. (Figure: Technological Progress and Productivity Growth) If there is significant technological progress (all other factors remaining unchanged), then this is best indicated by a move from? A) A to B B) B to A C) C to B D) B to C 23. (Figure: Technological Progress and Productivity Growth) Which of the following moves would be most likely to result over time from excessive government intervention that results in a decline in property rights? A) A to B B) B to C C) C to B D) none of the above 24. Which of the following is an advantage to the recipient country of foreign investment? A) Foreigners are content to receive lower profits and interest rates than are domestic investors. B) Foreigners don't expect to receive profits and interest as often as do domestic investors. C) Domestic firms with foreign investors are exempt from domestic income taxes on a portion of their net income. D) Foreign companies often bring new technology to the recipient country, and this increases productivity. 25. Sources of funds for investment spending are: A) savings by households, government, and foreigners. B) taxes and transfer payments. C) always equal to U.S. spending on imports. D) directed to their most productive uses by the U.S. government. 26. Which of the following CANNOT properly be called a part of infrastructure? A) power lines B) roads and bridges C) human capital D) sea ports

7 27. All of the following are examples of government policies aimed at promoting economic growth EXCEPT: A) building infrastructure and providing public goods. B) implementing a monetary policy that increases inflation. C) subsidizing education. D) providing political stability and protecting property rights. 28. The convergence hypothesis says that international differences in GDP per capita tend to: A) narrow over time. B) expand over time. C) remain steady over time. D) tend to narrow and then expand over time. 29. The convergence hypothesis helps explain why: A) highly educated people converge in high-income countries. B) high-income individuals marry other high-income individuals. C) high-income countries continue their high growth rates. D) high-income countries tend to have slower growth rates compared to lower-income countries. 30. The key factor explaining the poor growth performance of the African continent is probably: A) the lack of political stability within countries. B) the lack of natural resources. C) overpopulation. D) the prevalence of military conflicts among neighboring countries.

8 Answer Key 1. B 2. B 3. C 4. C 5. B 6. A 7. D 8. A 9. A 10. A 11. C 12. C 13. B 14. A 15. A 16. C 17. C 18. C 19. B 20. A 21. C 22. D 23. C 24. D 25. A 26. C 27. B 28. A 29. D 30. A