Lab #7. Chapter 7 Growth, Productivity, and Wealth in the Long Run

University of Lethbridge - Department of Economics ECON 1012 Introduction to Macroeconomics LAB Instructor: Michael G. Lanyi Lab #7 Chapter 7 Growth, Productivity, and Wealth in the Long Run Answer Sheet 1) 26) 51) 76) 2) 27) 52) 77) 3) 28) 53) 78) 4) 29) 54) 79) 5) 30) 55) 80) 6) 31) 56) 81) 7) 32) 57) 82) 8) 33) 58) 83) 9) 34) 59) 84) 10) 35) 60) 85) 11) 36) 61) 86) 12) 37) 62) 87) 13) 38) 63) 88) 14) 39) 64) 89) 15) 40) 65) 90) 16) 41) 66) 91) 17) 42) 67) 92) 18) 43) 68) 93) 19) 44) 69) 94) 20) 45) 70) 95) 21) 46) 71) 96) 22) 47) 72) 97) 23) 48) 73) 98) 24) 49) 74) 99) 25) 50) 75) 100) 1

University of Lethbridge - Department of Economics ECON 1012 Introduction to Macroeconomics LAB Instructor: Michael G. Lanyi Lab # 7 Chapter 7 Growth, Productivity, and Wealth in the Long Run 1. The Rule of 72 implies that a country with a growth rate of 8 percent will double its income in A) 4 years. B) 6 years. C) 9 years. D) 12 years. 2. The Rule of 72 implies that a country will double its income in 4 years if its growth rate is A) 8 percent. B) 12 percent. C) 18 percent. D) 25 percent. 3. Suppose Botswana doubles its income in 6 years while South Africa doubles its income in 9 years. According to the Rule of 72, the growth rate in Botswana is A) 3 percentage points higher than the growth rate in South Africa. B) 4 percentage points higher than the growth rate in South Africa. C) 8 percentage points higher than the growth rate in South Africa. D) 12 percentage points higher than the growth rate in South Africa. 4. In 1997, Hungary's population was 10 million and its GDP was $45 billion, so its per capita output was A) $450. B) $4,500. C) $222. D) $2,222. 5. If per capita output increases by 2 percent and population grows by 3 percent, output A) falls by 5 percent. B) falls by 1 percent. C) grows by 1 percent. D) grows by 5 percent. Page 1

6. If output increases by 2 percent and population growth is 3 percent, per capita output A) falls by 5 percent. B) falls by 1 percent. C) grows by 1 percent. D) grows by 5 percent. 7. If per capita output increases by 3 percent and output grows by 4 percent, the population must be A) falling at a rate of 7 percent. B) falling at a rate of 1 percent. C) increasing at a rate of 1 percent. D) increasing at a rate of 7 percent. 8. China has a A) lower level of GDP than Canada. B) lower per capita GDP than Canada. C) higher level of GDP than the United States. D) higher level of per capita GDP than the United States. 9. All of the following are important sources of growth except A) institutions with incentives compatible with growth. B) technological development. C) decreasing returns to scale. D) capital accumulation. 10. One reason why the Soviet Union failed to grow in the 20th Century is that it A) did not invest in capital goods. B) invested in too many consumer goods. C) licensed too many private enterprises, creating destructive competition. D) did not provide incentives for individuals to work hard. 11. Which of the following is the most important type of capital? A) Human capital. B) Physical capital. C) Social capital. D) The importance of each type of capital varies with time and circumstance. 12. Changes in technology A) affect the goods we buy. B) affect the way goods are produced. C) are an important source of economic growth. D) all of the above. Page 2

13. For a reduction in income tax rates to cause people to work more, the following must be true: A) The substitution effect must be greater than the income effect. B) The substitution effect must be less than the income effect. C) The supply of labour must be perfectly inelastic. D) The supply of labour must be perfectly elastic. 14. The production function is best represented in the following form: A) Output = A. B) Output = f(labour, Capital, Land). C) Output = A f(labour, Capital, Land). D) Output = [A f(labour, Capital, Land)] b. 15. Increasing returns to scale exist when doubling all inputs A) increases output. B) increases output but by less than double. C) doubles output. D) more than doubles output. 16. Suppose the quantities of labour, land, and capital each increase by 10 percent and output also increases by 10 percent. In that case, returns to scale are A) decreasing. B) constant. C) increasing. D) not defined since more than one input is changing. 17. If decreasing returns to scale exist, then an increase in all inputs of 5 percent should A) not affect output. B) should increase output by less than 5 percent. C) should increase output by 5 percent. D) should increase output by more than 5 percent. 18. Use the following table to answer the question. According to the table, production is characterized by Units of Capital Units of Labour Output 1 1 1 8 8 4 27 27 9 64 64 16 A) diminishing marginal productivity. B) decreasing returns to scale. C) constant returns to scale. D) increasing returns to scale. Page 3

19. The law of diminishing marginal productivity implies that increasing only one input will A) not increase output. B) lead to smaller and smaller increases in output. C) lead to identical increases in output. D) lead to larger and larger increases in output. 20. The growth model in which capital accumulation plays the key role is called the A) new growth model. B) Classical growth model. C) new Classical growth model. D) Keynesian model. Use the following to answer questions 21-22: 21. Refer to the graph above. Which of the above production functions most closely resembles the production function of the Classical growth model? A) A. B) B. C) C. D) D. 22. Refer to the graph above. Which of the above production functions reflects the law of diminishing marginal productivity? A) A. B) B. C) C. D) None of the production functions do since all inputs are being varied. 23. According to the Classical growth model, richer countries should grow A) faster than poor countries. B) at the same rate as poor countries. C) slower than poor countries. D) at a rate that increases over time. Page 4

24. Classical growth theory A) correctly predicted that growth rates would slow as countries became richer. B) incorrectly predicted that per capita income levels would converge across countries. C) correctly predicted that growth rates would accelerate as countries became richer. D) incorrectly predicted that per capita income levels would diverge even further across countries. 25. New growth theories emphasize the importance of increases in in explaining growth. A) capital B) labour C) technology D) land Page 5

O P T I O N A L : 26. Suppose Thailand grows at a rate of 8 percent, that Malaysia grows at a rate of 6 percent, and that both countries have the same initial per capita output level. Using the Rule of 72, it follows that in 36 years A) Thailand's per capita output will be 25 percent higher than Malayasia's per capita output. B) Thailand's per capita output will be 33 percent higher than Malayasia's per capita output. C) Thailand's per capita output will be 50 percent higher than Malayasia's per capita output. D) Thailand's per capita output will be 100 percent higher than Malayasia's per capita output. 27. Use the following table to answer the question. According to the table, production is characterized by Units of Capital Units of Labour Units of Output 10 50 500 20 100 2000 30 150 4500 40 200 8000 A) diminishing marginal productivity. B) decreasing returns to scale. C) constant returns to scale. D) increasing returns to scale. 28. The population of which country has the highest proportion of post-secondary degrees? A) Canada. B) United States. C) Japan. D) Germany. 29. Suppose Slovakia and Zimbabwe have the same populations but Slovakia has three times as much capital as Zimbabwe. Under these circumstances, the Classical growth model would predict that A) Slovakia would be richer than Zimbabwe and would grow faster. B) Slovakia would be richer than Zimbabwe and would grow slower. C) Zimbabwe would be poorer than Slovakia at first but would eventually become richer. D) Slovakia would always be richer than Zimbabwe. Page 6

7.4 Policy to Encourage Growth 30. The failure of the Classical growth model to accurately predict growth rates can be explained by all of the following factors EXCEPT A) human capital has not been measured correctly. B) physical capital includes elements of technology that have not been accounted for. C) world output has exceeded subsistence output. D) technology has overwhelmed the law of diminishing marginal productivity. 31. All of the following policies encourage per capita growth EXCEPT A) policies that encourage saving and investment. B) policies that reduce population growth. C) policies that improve education. D) policies that shelter important domestic industries from international competition. 32. All of the following policies encourage per capita growth EXCEPT A) policies that encourage consumption. B) policies that promote basic research. C) policies that reduce investor risk. D) policies that protect private property. 33. All of the following policies encourage per capita growth EXCEPT A) policies that reduce trade barriers. B) policies that improve worker skills. C) policies that permit the widespread adoption of new technologies at no cost. D) policies that protect private property. 34. Which of the following policies is most likely to promote per capita growth? A) An income tax. B) A cap on interest rates for saving accounts. C) A policy that discourages foreign investment. D) A consumption tax. 35. Saving and investment policies in developing countries A) should focus on raising the level of saving among the poor. B) should attempt to stem the flow of domestic saving abroad. C) should create financial institutions that allow individuals to save and invest. D) should do all of the above. Page 7

36. The borrowing circle concept originated in A) Bulgaria. B) Singapore. C) Bangladesh. D) South Korea. 37. The concept of borrowing circles used by the Grameen Bank was successful because it A) relied on social pressure. B) required that borrowers possess adequate collateral. C) allowed borrowers to default. D) relied on foreign investment from banks in developed countries. 38. Population control policies are likely to A) have little effect on per capita growth in developed or developing countries. B) be most successful in promoting per capita growth in developing countries. C) be most successful in promoting per capita growth in developed countries. D) have the same effect on per capita growth in developed and developing countries. 39. Growth in output is most likely to A) increase population growth. B) decrease population growth. C) have no effect on population growth. D) have an unpredictable effect on population growth. 40. Population control policies are important for all of the following reasons EXCEPT A) more rapid population growth exacerbates diminishing marginal productivity. B) more rapid population growth often increases the percentage of the population which is dependent. C) more rapid population growth makes it difficult to provide adequate education. D) more rapid population growth undermines private property rights. 41. Improvements in education are likely to have A) little effect on per capita growth in both developed and developing countries. B) a greater effect on per capita growth in developing countries. C) a greater effect on per capita growth in developed countries. D) about the same effect on growth in both developed and developing countries. Page 8

42. Patents A) reduce both the common knowledge element of technological development and the incentive to innovate. B) increase the common knowledge element of technological development but reduce the incentive to innovate. C) reduce the common knowledge element of technological development but increase the incentive to innovate. D) increase both the common knowledge element of technological development and the incentive to innovate. 43. Policies that promote only the common knowledge element of technology A) are superior to those that protect the property rights of innovators. B) are inferior to those that protect the property rights of innovators. C) have the same effect as those that protect the property rights of innovators. D) may be better or worse than those that protect the property rights of innovators. 44. Why does the corporation provide an incentive to innovate? A) Patents are awarded only to corporations. B) Corporations can avoid double taxation of their income. C) Corporations limit the risk to investors. D) Corporations are not affected by market forces. 45. Why does the stock market provide incentives to innovate? A) It provides a way to test new ideas directly. B) It spreads the risk of innovation across shareholders. C) It circumvents government regulation of technology. D) It issues patents for new innovations. 46. The returns to basic research are A) so high that no government funding is necessary. B) so low that the level of basic research would be inadequate without government funding. C) readily captured by private firms because the common knowledge aspect of this research is minimal. D) readily captured through patents. 47. The most likely explanation for clusters of innovating firms is A) comparative advantage. B) increasing returns to scale. C) positive externalities. D) diminishing marginal productivity. Page 9

48. Basic research is funded primarily by A) small corporations. B) large corporations. C) the federal government. D) provincial governments. 49. Organizations such as the WTO that reduce trade barriers serve to A) reduce per capita growth by increasing competition and driving down profits. B) increase per capita growth by increasing the degree of specialization. C) reduce per capita growth by decreasing employment at less competitive firms. D) increase per capita growth by promoting international cooperation. 50. Growth usually leads to decreased birth rates because when there is growth, A) men and women are too tired to have kids. B) the opportunity cost of having children rises. C) pollution reduces the fertility of the population. D) immigration crowds out endogenous population growth. 51. Patents create A) incentives to innovate and hence are a good thing. B) barriers to entry and hence are a bad thing. C) barriers to entry and incentives to innovate and hence are both a bad and good thing. D) common knowledge and hence are a good thing. 52. Which of the following policies will slow an economy's growth rate? A) Increasing trade restrictions. B) Increasing the level of education. C) Increasing saving. D) Protecting property rights. 53. The Laffer curve implies A) a reduction in income tax rates always increases tax revenue. B) when labour supply is very inelastic, a reduction in income tax rates will likely increase tax revenue. C) when income tax rates are very high, a reduction will likely decrease tax revenue. D) when income tax rates are very high, a reduction will likely increase tax revenue. 54. Lowering income tax rates always A) increases the opportunity cost of leisure. B) decreases the opportunity cost of leisure. C) causes people to work more. D) causes people to work less. Page 10

55. All of the following policies encourage per capita growth EXCEPT A) policies to encourage saving and investment. B) policies to improve incentives to work. C) policies to improve education. D) policies to shelter important domestic industries from international competition. 56. All of the following policies encourage per capita growth EXCEPT A) policies that discourage work. B) policies that promote basic research. C) policies that reduce investor risk. D) policies that protect private property. 57. When the Reagan administration cut American taxes in 1981, A) the federal deficit went down. B) spending was cut at the same time, so the deficit would not increase. C) economist Arthur Laffer predicted that tax revenues would decrease. D) the federal deficit increased. 58. Supply side economists would be the economists most likely to recommend which of the following policies to increase economic growth: A) an income tax increase. B) an income tax reduction. C) policies to reduce imports. D) policies to increase trade. 59. Supply side policies regarding economic growth are strongest when A) labour supply is inelastic. B) the income effect of a tax cut (or increase) is very strong. C) the labour supply curve is very steep. D) the substitution effect of a tax cut (or increase) is very strong. 60. Supply side policies regarding economic growth are weakest when A) labour supply is very elastic. B) the income effect of a tax cut (or increase) is very strong. C) the labour supply curve is very flat. D) the substitution effect of a tax cut (or increase) is very strong. Page 11