Chapter 04 - Growth and Policy

Chapter 04
Growth and Policy

MultipleChoiceQuestions

1.Assumeaproductionfunctionwithonlytwoinputs,capitalandlabor.Inthiscase,the
conceptofadiminishingmarginalproductofcapitalimpliesthat
a.Aslesscapitalisbeingused,moreandmorelaborhastobeemployedtoincreaseoutput
b.Asbothlaborandcapitalinputsareincreased,outputincreasesbutatadecreasingrate
C.Astheamountofcapitalisincreasedandtheamountoflaborremainsfixed,output
increasesbutatadecreasingrate
d.Astheamountofcapitalincreasesandtheamountoflaborremainsfixed,outputcannot
increase
e.Laborinputshaveabiggerimpactonincreasingoutputthancapitalinputs

Difficulty:Medium

2.WhichofthefollowingcountrieshadtheHIGHESTcumulativegrowthrateofGDPper
capitabetween1950and1988?
a.China
b.India
c.Mexico
D.SouthKorea
e.UnitedStates

Difficulty:Easy

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Chapter 04 - Growth and Policy

3.WhichofthefollowingcountrieshadtheLOWESTcumulativegrowthrateofGDPper
capitabetween1950and1988?
a.Bangladesh
b.Egypt
C.Ghana
d.Tanzania
e.Thailand

Difficulty:Easy

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Chapter 04 - Growth and Policy

4.WhichofthefollowingcountrieshadacumulativegrowthrateofGDPpercapitabetween
1950and1988thatcomesclosesttothatoftheUnitedStates?
a.China
b.Indonesia
C.Mexico
d.Taiwan
e.Thailand

Difficulty:Easy

5.WhichofthefollowingeconomistsdidNOTsignificantlycontributetothedebateon
exogenousvs.endogenousgrowth?
a.RobertBarro
b.GregoryMankiw
c.RobertLucas
D.DavidRicardo
e.PaulRomer

Difficulty:Easy

6.Aproductionfunctionthatassumesadiminishingmarginalproductofcapital
a.Generatesastraightsavingsline
b.Ensuresthatthesavingslineisalwaysabovetheinvestmentrequirementline
C.Ensuresthatthesavingslineandtheinvestmentrequirementlinecross
d.Isessentialtotheendogenousgrowthmodel
e.Violatesimportantmicroeconomicprinciples

Difficulty:Medium

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Chapter 04 - Growth and Policy

7.Theconceptofdiminishingmarginalreturnsimpliesthat
a.Outputcannotdecreaseaslongaslaborissubstitutedforcapital
b.Outputdecreasesifeitherlabororcapitalisdecreased
C.Outputincreasesbutatadecreasingrateastheamountoflaborisincreasedandthe
amountofcapitalremainsfixed
d.Ifthecapitalstockiskeptconstant,outputcannotincreaseevenifmorelaborisavailable
e.Outputincreasesbutonlyiftheamountsofbothlaborandcapitalincrease

Difficulty:Medium

8.Theassumptionofconstantreturnstocapitalaloneimpliesthatlargerfirmsshouldbemore
efficientthansmallerfirms.Thereasonthisdoesn'tnecessarilyimplyatendencytoward
monopolizationisthat
a.Mostindustriesareperfectlycompetitiveinnature
b.Firmshavemoreinputsthanjustcapital
c.Constantreturnstocapitalalonestillimpliesdecreasingreturnstoallfactorsofproduction
takentogether
D.Ifonefirmsincreasesitsuseofcapital,otherfirmscanalsocapturesomeoftheproduction
benefitsofthenewcapitalthroughspillovereffects
e.Noneoftheabove

Difficulty:Medium

9.WhichofthefollowingstatementsisFALSE?
a.Endogenousgrowththeoryreliesonconstantreturnstoscaleofcapitalalonetogenerate
ongoinggrowth
B.Endogenousgrowththeorypredictsthatanincreaseinpopulationgrowthwillalwayslead
toanincreaseintheoverallgrowthrate
c.Themicroeconomicsunderlyingendogenousgrowththeoryemphasizestheexistenceof
substantialexternalreturnstocapital
d.Endogenousgrowththeorypredictsthatahighsavingsratecangenerateahighgrowthrate
e.Empiricalevidencesuggeststhatendogenousgrowththeoryisnotveryimportantfor
explainingdifferencesingrowthamongcountries

Difficulty:Easy

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Chapter 04 - Growth and Policy

10.Accordingtotheendogenousgrowththeory
a.Countrieswiththesametechnologyandpopulationgrowtheventuallyconvergetothesame
steadystategrowthrateindependentofthesavingsrate
b.Thesteadystategrowthratedecreasesastherateofaccumulationoffactorsofproduction
increases
c.Thelongtermgrowthrateofcapitalisnotaffectedbythesavingsrate
D.Thesteadystategrowthrateisaffectedbytherateatwhichthefactorsofproductionare
accumulated
e.Noneoftheabove

Difficulty:Easy

11.Aproductionfunctionwithconstantreturnstoscaleforcapitalaloneimpliesthat
a.Thereareincreasingreturnstoscaleforallfactorsofproductiontakentogether
b.Ifallinputsaredoubledthenoutputwillmorethandouble
c.Smallerfirmsaremoreefficientthanlargerfirms
d.Technologicaladvancescannottakeplace
E.BothAandB

Difficulty:Medium

12.IfwehaveanaggregateproductionfunctionoftheformY=aK,atwhatcapitallabor
ratiocanasteadystateequilibriumbereached?
a.k=sa(n+d)
b.k=sa+(nd)
c.k=sa/(n+d)
d.k=ay/(n+d)
E.Never

Difficulty:Medium

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Chapter 04 - Growth and Policy

13.Assumewehaveasimpleendogenousgrowthmodelwheretechnologyislabor
augmenting,thatis,Y=F(K,AN),andalsoproportionaltothecapitallaborratio,suchthaty
=ak.Inthiscase,thegrowthrateofGDPpercapitacanbeexpressedby
a.sa+(n+d)
B.sa(n+d)
c.sa(n+d)k
d.sa+(nd)k
e.sk(n+d)a

Difficulty:Difficult

14.Assumeanendogenousgrowthmodelwithlaboraugmentingtechnology.Theproduction
functionisY=F(K,AN)withA=2(K/N),soy=2k.Ifthesavingsrateiss=0.05andthere
isneitherpopulationgrowthnordepreciationofcapital,whatisthegrowthrateofoutput?
a.0%
b.2.5%
c.5%
D.10%
e.Itcannotbedetermined

Difficulty:Medium

15.Assumeanendogenousgrowthmodelwithlaboraugmentingtechnologyandaproduction
functionoftheformY=F(K,AN),withA=2(K/N)suchthaty=2k.Ifthesavingsrateiss=
0.08,therateofpopulationgrowthisn=0.03,andtherateofdepreciationisd=0.04,whatis
thegrowthrateofoutputpercapita?
a.1%
b.3%
c.4%
d.7%
E.9%

Difficulty:Medium

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Chapter 04 - Growth and Policy

16.Assumeanendogenousgrowthmodelwithlaboraugmentingtechnology.Theproduction
functionisY=F(K,AN),whereA=2(K/N)suchthaty=2k.Ifthesavingsrateiss=0.06,
therateofpopulationgrowthisn=0.05,andtherateofdepreciationisd=0.04,thenthe
growthrateofrealoutputpercapitais
a.1%
B.3%
c.5%
d.6%
e.9%

Difficulty:Medium

17.Assumeanendogenousgrowthmodelwithlaboraugmentingtechnologyandaproduction
functionoftheformY=F(K,AN),whereA=1.2(K/N)suchthaty=(1.2)k.Iftherateof
populationgrowthisn=0.06andtherateofdepreciationisd=0.04,howlargedoesthe
savingsrate(s)havetobetoachieveapercapitagrowthrateof8percent?
a.6%
b.10%
C.15%
d.24%
e.30%

Difficulty:Medium

18.Assumeanendogenousgrowthmodelwithlaboraugmentingtechnologyandaproduction
functionoftheformY=F(K,AN),whereA=1.2(K/N)suchthaty=(1.2)k.Ifthesavings
rateiss=0.15andtherateofdepreciationisd=0.05,howhighdoespopulationgrowth(n)
havetobetoachieveagrowthrateof10percent?
a.15%
b.12%
c.10%
d.5%
E.3%

Difficulty:Medium

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Chapter 04 - Growth and Policy

19.Assumeanendogenousgrowthmodelwithlaboraugmentingtechnology.Theproduction
functionisY=F(K,AN),whereA=a(K/N)suchthaty=ak.Ifthesavingsrateiss=0.1,the
rateofpopulationgrowthisn=0.04,andthedepreciationrateisd=0.02,howmuchwould
"a"havetobetoachievea12%growthrateofoutput?
a.0.6
b.1.2
C.1.8
d.2.0
e.2.4

Difficulty:Medium

20.IfweconsiderthepercapitaGDPofChinaandIndiaoverthelastthreedecades,we
realizethat
a.Investmentinhumancapitalplayedonlyaminorroleinthesecountries'economicsuccess
B.Whileinvestmentinhumancapitalisimportantforeconomicgrowth,soareinstitutional
changesandopennesstotrade
c.India'sgrowthinGDPpercapitawashigherthanChina'sduetomoreinvestmentinhuman
capital
d.Neithercountry'sGDPpercapitagrewmuchuntilthe1990s
e.Thedifferenceingrowthratesbetweenthesecountriescanlargelybeexplainedbythe
differenceinyearsofschooling

Difficulty:Medium

21.AcomparisonofpercapitaGDPinChinaandIndiaoverthelastthreedecadesindicates
that
a.Neithercountry'sGDPpercapitagrewmuchuntilthemid1990s
b.IndiahasahigherGDPpercapitathanChinasinceitexperienceditsgrowthspurtearlier
C.Bothcountriesstartedpoorin1960,butbytheyear2000China'sGDPpercapitawas
almosttwiceashighasIndia's
d.Bothcountry'sGDPpercapitagrewsignificantlyandataboutthesamerate
e.India'sGDPpercapitagrewmorethanChina'sduetomoreinvestmentinhumancapital

Difficulty:Medium

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Chapter 04 - Growth and Policy

22.AcomparisonofpercapitaGDPandyearsofschoolingbetweenChinaandIndiaoverthe
lastthreedecadesindicatesthat
a.ThegrowthtrendsofbothvariablesaresignificantlyhigherinChina
b.ThegrowthtrendsofbothvariablesaresignificantlyhigherinIndia
c.Thegrowthtrendsofbothvariablesweresimilarinbothcountries
D.WhilethepercapitaGDPgapbetweenthetwocountriesincreasedsignificantly,thegapin
yearsofschoolingdidn't
e.Whilethegapinyearsofschoolingbetweenthetwocountriesincreasedsignificantly,the
gapinGDPpercapitadidn't

Difficulty:Easy

23.Theneoclassicalgrowthmodelpredictsconditionalconvergenceforcountrieswiththe
samepopulationgrowth,leveloftechnology,and
a.Ahighersavingsrate
b.Alowersavingsrate
c.Thesamesavingsrate
D.Alloftheabove
e.Noneoftheabove

Difficulty:Medium

24.Theneoclassicalgrowthmodelpredictsabsoluteconvergenceforcountrieswiththe
A.Sametechnology,savingsrate,andpopulationgrowth
b.Sametechnologyandsavingsrate,butdifferentratesofpopulationgrowth
c.Sametechnologyandpopulationgrowth,butdifferentsavingsrates
d.Samepopulationgrowthandsavingsrate,butdifferentlevelsoftechnology
e.Samepopulationgrowth,butdifferentlevelsoftechnologyorsavingsrates

Difficulty:Medium

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Chapter 04 - Growth and Policy

25.Thereasonthatcountrieswithhighersavingratesmayhavehigherequilibriumgrowth
ratesisthat
a.Peoplewhosavemorealsoaremoreindustrious
b.Higherincomeallowsformoresavings
C.Ahighersavingrateallowsformoreinvestmentinhumancapitalwhichultimately
enhanceseconomicgrowth
d.Havingmorecapitalequipmentismoreimportantthanhavingbettercapitalequipment
e.Noneoftheabove

Difficulty:Medium

26.Assumeagrowthmodelwithendogenouspopulationgrowththathasaninvestment
requirementthatrisesslowlyatfirst,thenrisessharply,andeventuallyflattensout.Inthis
casewecanget
a.Threesteadystateequilibria,onlyoneofwhichisstable
b.Threesteadystateequilibria,onlytwoofwhicharestable
c.Threesteadystateequilibria,allofwhicharestable
d.Onestablesteadystateequilibrium,butonlyifthesavingsrateishighenough
E.BothBandDarepossible

Difficulty:Difficult

27.Separatingprivatereturnstocapitalfromsocialreturnstocapital,thatis,theideathat
investmentincapitalmayhavepositivespillovereffectsasnewideasandnewwaysofdoing
thingscanbeeasilycopiedbyothers,wasfirstadvocatedby
a.RobertBarro
b.RobertLucas
c.RobertSolow
d.PaulSolow
E.PaulRomer

Difficulty:Medium

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Chapter 04 - Growth and Policy

28.Anendogenousgrowthmodelpredictsthatiftheratesofbothpopulationgrowthand
savingincrease,thenthegrowthrateofGDPpercapitawill
a.Increase
b.Decrease
c.Staythesame
d.Temporarilyincrease,butthengobacktoitsoriginallevel
E.Eitherincrease,decrease,orstaythesame(wecannotsayforsure)

Difficulty:Medium

29.Akeyassumptioninanendogenousgrowthmodelwithbothlaborandcapitalinputsin
theproductionfunctionisthat
a.Theshareofcapitalislargerthantheshareoflabor
b.Theshareofcapitalandlaborhastobeequal
C.Bettertechnologyisabyproductofmorecapitalinvestment
d.Therearenoexternalreturnstocapital
e.Longrungrowthcomessolelyfromtechnologicalprogress

Difficulty:Easy

30.Thenotionofconditionalconvergencestatesthatcountrieswiththesamepopulation
growthandaccesstothesametechnologywillreachasteadystateequilibriumat
A.Differentlevelsofoutputbutthesamegrowthrate,iftheirsavingsratesaredifferent
b.Differentlevelsofoutputanddifferentgrowthratesiftheirsavingsratesaredifferent
c.Thesamelevelofoutputandthesamegrowthrate,eveniftheirsavingsratesaredifferent
d.Thesamelevelofoutputbutdifferentgrowthratesiftheirsavingsratesaredifferent
e.Thesamelevelofoutputandthesamegrowthrateiftheirsavingsratesarethesamebut
theirratesofdepreciationdiffer

Difficulty:Medium

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Chapter 04 - Growth and Policy

31.InasimpleversionoftheSolowgrowthmodelwithendogenouspopulationgrowth,a
countrycanescapethepovertytrapby
a.Loweringthesavingsrateanddevotingmoreresourcestoconsumption
b.Loweringpopulationgrowth
c.Raisingthesavingsrate
d.BothAandB
E.BothBandC

Difficulty:Easy

32.WhichofthefollowingisNOTanimportantfactorinestablishinghighgrowthfora
country?
A.Astablemonetarygrowthrate
b.Ahighsavingsrate
c.Lowpopulationgrowth
d.Apredictableeconomicandpoliticalenvironment
e.Policiestoencourageindustriestocompeteinworldmarkets

Difficulty:Medium

33.Whichofthefollowingpolicyoptionsislikelytobemostsuccessfulingettingapoor
countryoutofthepovertytrap?
a.Expansionaryfiscalpolicy
b.Expansionarymonetarypolicy
c.Labormarketpolicies
D.Programstolimitpopulationgrowth
e.Investmentsubsidies

Difficulty:Easy

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Chapter 04 - Growth and Policy

34.WhichofthefollowingpoliciesdoesNOTaffectthelongtermgrowthrateofanation?
a.Investmenttaxcreditsoranyotherpolicythatreducesthecostofcapital
B.Anexpansionaryfiscal/expansionarymonetarypolicymix
c.Increasedfundingforprimaryeducation
d.Incentivestoincreasesaving
e.Morefundingforresearchanddevelopment

Difficulty:Easy

35.Countriescanachievecontinuedeconomicgrowthaslongas
a.Technologicaladvancescontinue
b.Educationalprogresscontinues
c.Intelligentresourcemanagementispracticed
D.Alloftheabove
e.OnlyAandB

Difficulty:Easy

36.RobertBarro'sempiricalfindingsthatcountrieswithhigherlevelsofinvestmentwill
achieveasteadystatewithahigherpercapitaincomebutnotwithahighergrowthrate
supports
a.Thenotionofabsoluteconvergence
B.Thenotionofconditionalconvergence
c.Thepredictionsoftheendogenousgrowththeory
d.Thebeliefthatahighsavingsrateisnotbeneficialforanynation
e.Thebeliefthattechnologyisnotveryimportant

Difficulty:Easy

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Chapter 04 - Growth and Policy

37.Developedcountriesthatdirecttheirinvestmenttowardsphysicalcapitalratherthan
researchanddevelopmentcanexpectto
a.Haveahigherlevelofoutputintheshortrunandahigherlongrungrowthrate
b.Havealowerlevelofoutputintheshortrunandlowerlongrungrowthrate
c.Havealowerlevelofoutputintheshortrunbutahigherlongrungrowthrate
D.Haveahigherlevelofoutputintheshortrunbutalowerlongrungrowthrate
e.AchieveAbutonlyifthelevelofinvestmentexceeds1/3ofGDP

Difficulty:Medium

38.Foradevelopingcountrythatwantstoincreaseitsstockofrealcapitalfairlyquickly,
whichofthefollowingisNOTavalidoption?
A.Implementingpoliciesdesignedtoincreaseeducationallevels
b.Askingforeignfirmsfordirectinvestmentsinthecountry
c.BorrowingfundsfromtheWorldBankforinvestment
d.Askingothercountriesforforeignaidtobuynewmachines
e.Increasingprivatedomesticsaving

Difficulty:Easy

39.Howmanyyearswillittakeacountrythatgrowsatanaveragerateof2%peryearto
doublethesizeofitsGDP?
a.100
b.50
C.35
d.20
e.15

Difficulty:Easy

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Chapter 04 - Growth and Policy

40.AssumeIndia'sincomelevelisnowroughly5%ofthatoftheUnitedStates.Assuming
thereisnochangeinthesavingsratesandthelevelsoftechnologyofthesetwocountries,
howmanyyearswillittakeforIndiatoreach10%oftheU.S.'sincomelevel?
a.10
b.20
c.25
D.35
e.50

Difficulty:Easy

41.IftwocountrieshavethesameshareofinvestmenttoGDP,theonethatexperiencesa
fastergrowthrateismostlikelytheonethat
A.Emphasizesfreemarketpoliciesandencouragesforeigntrade
b.Protectsdomesticindustryfromforeigncompetitionwithtradebarriers
c.Investslessingovernmentinfrastructure
d.HasahighershareofgovernmentspendingtoGDP
e.Hasmoregovernmentregulationsandspendsmorefundstoprotecttheenvironment

Difficulty:Easy

42.Thereisnosimplerelationshipbetweentheproportionofinvestmenttooutputandthe
growthrateofpercapitaoutputsince
a.Populationgrowthratesdifferamongcountries
b.Incomegrowthratesdifferamongcountries
C.Theefficiencyofinvestmentamongcountriescanvarywidely
d.Thesavingsratesamongcountriescanvarywidely
e.Noneoftheabove

Difficulty:Medium

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Chapter 04 - Growth and Policy

43.WhichofthefollowingcountriesisNOToneofthe"AsianTigers"?
a.HongKong
B.Japan
c.Singapore
d.SouthKorea
e.Taiwan

Difficulty:Easy

44.The"AsianTigers"achievedhigheconomicgrowthfrom1966to1990inpartbecause
they
a.Hadveryhighsavingsrates
b.Successfullycontrolledtheirpopulationgrowth
C.Devotedmanyresourcestoeducation
d.BothBandC
e.BothAandC

Difficulty:Easy

45.WhichofthefollowingwasNOTacommonelementcontributingtothegrowthofthe
four"AsianTigers"between1966and1990?
a.Anincreaseinthelaborforceparticipationrate
b.Higheducationalachievement
c.Ahighsavingsrate
D.Emphasisonlaissezfaireeconomics
e.Anincreaseintotalfactorproductivityachievedbyhigherlevelsofinputs

Difficulty:Easy

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Chapter 04 - Growth and Policy

46.Thecommonelementintheireconomicsuccessbetween1966and1990thatthefour
"AsianTigers"sharedisthattheyachievedtheireconomicgrowthmostlythrough
A.Hardworkandsacrifice
b.Protectingdomesticindustriesthroughtariffs
c.Substantiallyincreasinggrowthintotalfactorproductivity
d.Controllingpopulationgrowth
e.Alargedegreeofgovernmentintervention

Difficulty:Easy

47.HongKongandSingaporeachievedhigheconomicgrowthbetween1966and1990.
WhichofthefollowingcharacteristicsdidthesetwocountriesNOThaveincommon?
a.Afairlystablegovernment
B.Averylowdegreeofgovernmentintervention
c.Industrieswereencouragedtoexportandcompeteinworldmarkets
d.Increasesinlaborforceparticipationrates
e.Greatinvestmentsinhumancapital

Difficulty:Medium

48.HongKong,Korea,SingaporeandTaiwanachievedhigheconomicgrowthbetween1960
and1990becausethey
a.Initiallyprotecteddomesticproducers,butthenproceededtoexposethemtoforeign
competition
b.Hadveryhighsavingsrates
c.Hadlargeincreasesinthelaborforceparticipationratesofwomen
d.Increasedinputssubstantially,althoughtotalfactorproductivitydidnotincrease
substantially
E.Alloftheabove

Difficulty:Easy

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Chapter 04 - Growth and Policy

49.Between1966and1990Singapore'sGDPpercapitagrewatanaverageannualrateof
6.8%.Duringthesametimeframeitsgrowthrateintotalfactorproductivitywas
A.0.2%
b.1.2%
c.2.2%
d.3.2%
e.4.2%

Difficulty:Easy

50.Between1966and1990HongKongexperiencedamuchhighergrowthrateofoutput
thanSingapore.ThiswasatleastpartiallyduetothefactthatSingaporehadagovernment
that
a.Emphasizedalaissezfaireattitudetowardsmarketactivities
B.Maintainedmuchtightercontrolovermarketactivities
c.Discouragedarapidpaceofforeigninvestmentinnewtechnology
d.Imposedstrictpopulationcontrolprograms
e.Noneoftheabove

Difficulty:Easy

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