CHAPTER 4

GROWTH AND POLICY

Difficulty: Medium
1. Assume a production function with only two inputs, capital and labor. In this case, the
concept of a diminishing marginal product of capital implies that
A) as less capital is being used, more and more labor has to be employed to increase output
B) as both labor and capital inputs are increased, output increases but at a decreasing rate
C) as the amount of capital is increased and the amount of labor remains fixed, output increases
but at a decreasing rate
D) as the amount of capital increases and the amount of labor remains fixed, output cannot
increase
E) labor inputs have a bigger impact on increasing output than capital inputs
Ans: C

Difficulty: Easy
2. Which of the following countries had the HIGHEST average annual growth rate of GDP per
capita between 1988 and 2010?
A) China
B) India
C) Mexico
D) South Korea
E) United States
Ans: A

Difficulty: Easy
3. Which of the following countries had the LOWEST average annual growth rate of GDP per
capita between 1988 and 2010?
A) Egypt
B) Ghana
C) Tanzania
D) Thailand
E) United States
Ans: E

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Difficulty: Easy
4. Which of the following countries annual growth rate of GDP per capita between 1988 and
2010 was closest to that of the United States?
A) China
B) Egypt
C) Indonesia
D) Tanzania
E) Thailand
Ans: C

Difficulty: Easy
5. Which of the following economists did NOT significantly contribute to the debate on
exogenous versus endogenous growth?
A) Robert Barro
B) Gregory Mankiw
C) Robert Lucas
D) David Ricardo
E) Paul Romer
Ans: D

Difficulty: Medium
6. A production function that assumes a diminishing marginal product of capital
A) generates a straight savings line
B) ensures that the savings line is always above the investment requirement line
C) ensures that the savings line and the investment requirement line cross
D) is essential to the endogenous growth model
E) violates important microeconomic principles
Ans: C

Difficulty: Medium
7. The concept of diminishing marginal returns implies that
A) output cannot decrease as long as labor is substituted for capital
B) output decreases if either labor or capital is decreased
C) output increases but at a decreasing rate as the amount of labor is increased and the amount
of capital remains fixed
D) if the capital stock is kept constant, output cannot increase even if more labor is available
E) output increases but only if the amounts of both labor and capital increase
Ans: C

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Difficulty: Medium
8. The assumption of constant returns to capital alone implies that larger firms should be more
efficient than smaller firms. The reason this doesn't necessarily imply a tendency toward
monopolization is that
A) most industries are perfectly competitive in nature
B) firms have more inputs than just capital
C) constant returns to capital alone still implies decreasing returns to all factors of production
taken together
D) if one firms increases its use of capital, other firms can also capture some of the production
benefits of the new capital through spillover effects
E) none of the above
Ans: D

Difficulty: Easy
9. Which of the following statements is FALSE?
A) endogenous growth theory relies on constant returns to scale of capital alone to generate
ongoing growth
B) endogenous growth theory predicts that an increase in population growth will always lead to
an increase in the overall growth rate
C) the microeconomics underlying endogenous growth theory emphasizes the existence of
substantial external returns to capital
D) endogenous growth theory predicts that a high savings rate can generate a high growth rate
E) empirical evidence suggests that endogenous growth theory is not very important for
explaining differences in growth among countries
Ans: B

Difficulty: Easy
10. According to the endogenous growth theory
A) countries with the same technology and population growth eventually converge to the same
steady-state growth rate independent of the savings rate
B) the steady-state growth rate decreases as the rate of accumulation of factors of production
increases
C) the long-term growth rate of capital is not affected by the savings rate
D) the steady-state growth rate is affected by the rate at which the factors of production are
accumulated
E) none of the above
Ans: D

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Difficulty: Medium
11. Countries with higher saving rates may have higher equilibrium growth rates since
A) people who save more also are more industrious
B) higher income allows for more savings
C) a higher saving rate allows for more investment in human capital which ultimately enhances
economic growth
D) having more capital equipment is more important than having better capital equipment
E) none of the above
Ans: C

Difficulty: Medium
12. A production function with constant returns to scale for capital alone implies that
A) there are increasing returns to scale for all factors of production taken together
B) if all inputs are doubled then output will more than double
C) smaller firms are more efficient than larger firms
D) technological advances cannot take place
E) both A) and B)
Ans: E

Difficulty: Medium
13. If we have an aggregate production function of the form Y = aK, at what capital-labor ratio
can a steady-state equilibrium be reached?
A) k = sa - (n + d)
B) k = sa + (n - d)
C) k = sa/(n + d)
D) k = ay/(n + d)
E) never
Ans: E

Difficulty: Difficult
14. Assume we have a simple endogenous growth model where technology is labor augmenting,
that is, Y = F(K,AN), and also proportional to the capital-labor ratio, such that y = ak. In this
case, the growth rate of GDP per capita can be expressed by
A) sa + (n + d)
B) sa - (n + d)
C) sa - (n + d)k
D) sa + (n - d)k
E) sk - (n + d)a
Ans: B

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Difficulty: Medium
15. Assume an endogenous growth model with labor augmenting technology. The production
function is Y = F(K,AN) with A = 2(K/N), so y = 2k. If the savings rate is s = 0.05 and there
is neither population growth nor depreciation of capital, what is the growth rate of output?
A) 0%
B) 2.5%
C) 5%
D) 10%
E) it cannot be determined
Ans: D

Difficulty: Medium
16. Assume an endogenous growth model with labor augmenting technology. The production
function is Y = F(K,AN), with A = 2(K/N) such that y = 2k. If the savings rate is s = 0.08, the
rate of population growth is n = 0.03, and the rate of depreciation is d = 0.04, what is the
growth rate of output per capita?
A) 1%
B) 3%
C) 4%
D) 7%
E) 9%
Ans: E

Difficulty: Medium
17. Assume an endogenous growth model with labor augmenting technology. The production
function is Y = F(K,AN), where A = 2(K/N) such that y = 2k. If the savings rate is s = 0.06,
the rate of population growth is n = 0.05, and the rate of depreciation is d = 0.04, then the
growth rate of real output per capita is
A) 1%
B) 3%
C) 5%
D) 6%
E) 9%
Ans: B

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Difficulty: Medium
18. Assume an endogenous growth model with labor augmenting technology and a production
function of the form Y = F(K,AN), where A = 1.2(K/N) such that y = (1.2)k. If the rate of
population growth is n = 0.06 and the rate of depreciation is d = 0.04, how large does the
savings rate (s) have to be to achieve a per-capita growth rate of 8 percent?
A) 6%
B) 10%
C) 15%
D) 24%
E) 30%
Ans: C

Difficulty: Medium
19. Assume an endogenous growth model with labor augmenting technology and a production
function of the form Y = F(K,AN), where A = 1.2(K/N) such that y = (1.2)k. If the savings
rate is s = 0.15 and the rate of depreciation is d = 0.05, how high does population growth (n)
have to be to achieve a growth rate of 10 percent?
A) 15%
B) 12%
C) 10%
D) 5%
E) 3%
Ans: E

Difficulty: Medium
20. Assume an endogenous growth model with labor augmenting technology. The production
function is Y = F(K,AN), where A = a(K/N) such that y = ak. If the savings rate is s = 0.1, the
rate of population growth is n = 0.04, and the depreciation rate is d = 0.02, how much would
"a" have to be to achieve a 12% growth rate of output?
A) 0.6
B) 1.2
C) 1.8
D) 2.0
E) 2.4
Ans: C

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Difficulty: Medium
21. If we consider the per-capita GDP of China and India over the last five decades, we realize
that
A) despite vast differences in population growth, both countries' per-capita GDP grew at
approximately the same rate
B) while investment in human capital is important for economic growth, so are institutional
changes and openness to trade
C) India’s growth in per-capita GDP was higher than China’s due to more investment in human
capital
D) neither country’s per-capita GDP grew significantly until the 1990s
E) the difference in growth rates between these countries can largely be explained by the
difference in years of schooling
Ans: B

Difficulty: Medium
22. A comparison of per-capita GDP in China and India over the last five decades indicates that
A) neither country’s per-capita GDP grew much until the mid-1990s
B) India has a higher per-capita GDP than China since it experienced its growth spurt earlier
C) both countries started poor in 1960, but by the year 2000 China’s per-capita GDP was almost
twice as high as India’s
D) both country’s per-capita GDP grew significantly and at about the same rate
E) India’s per-capita GDP grew more than China’s due to more investment in human capital
Ans: C

Difficulty: Easy
23. A comparison of per-capita GDP in China and India over the last five decades indicates that
A) increases in physical capital contributed more to growth in China than in India
B) increases in physical capital contributed more to growth in India than in China
C) India's per-capita GDP grew more than China’s due to lower population growth
D) while per-capita GDP of the two countries increased at about the same rate, India's total
factor productivity increased much more than China's
E) while China's total factor productivity increased much more than India's, the per-capita GDP
in both countries increased at about the same rate
Ans: A

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Difficulty: Medium
24. The neoclassical growth model predicts conditional convergence for countries with the same
population growth, level of technology, and
A) a higher savings rate
B) a lower savings rate
C) the same savings rate
D) all of the above
E) none of the above
Ans: D

Difficulty: Medium
25. The neoclassical growth model predicts absolute convergence for countries with the
A) same technology, savings rate, and population growth
B) same technology and savings rate, but different rates of population growth
C) same technology and population growth, but different savings rates
D) same population growth and savings rate, but different levels of technology
E) same population growth, but different levels of technology or savings rates
Ans: A

Difficulty: Difficult
26. In a growth model with endogenous population growth and an investment requirement that
rises slowly at first then rises sharply and eventually flattens out, we can get
A) three steady-state equilibria, only one of which is stable
B) three steady-state equilibria, only two of which are stable
C) three steady-state equilibria, all of which are stable
D) one stable steady-state equilibrium, but only if the savings rate is high enough
E) both B) and D) are possible
Ans: E

Difficulty: Medium
27. An endogenous growth model predicts that if the rates of both population growth and saving
increase, then the growth rate of GDP per capita will
A) increase
B) decrease
C) stay the same
D) temporarily increase, but then go back to its original level
E) either increase, decrease, or stay the same (we cannot say for sure)
Ans: E

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Difficulty: Easy
28. Which of the following policies does NOT affect the long-term growth rate of a nation?
A) investment tax credits or any other policy that reduces the cost of capital
B) an expansionary fiscal/expansionary monetary policy mix
C) increased funding for primary education
D) incentives to increase saving
E) more funding for research and development
Ans: B

Difficulty: Medium
29. A key assumption in an endogenous growth model with both labor and capital inputs in the
production function is that
A) the share of capital is larger than the share of labor
B) the share of capital and labor have to be equal
C) better technology is a byproduct of more capital investment
D) there are no external returns to capital
E) long-run growth comes solely from technological progress
Ans: C

Difficulty: Easy
30. In a simple version of the Solow growth model with endogenous population growth, a
country can escape the poverty trap by
A) lowering the savings rate and devoting more resources to consumption
B) lowering population growth
C) raising the savings rate
D) both A) and B)
E) both B) and C)
Ans: E

Difficulty: Easy
31. Separating private returns to capital from social returns to capital, that is, the idea that
investment in capital may have positive spillover effects as new ideas and new ways of doing
things can be easily copied by others, was first advocated by
A) Robert Barro
B) Robert Lucas
C) Robert Samuelson
D) Paul Solow
E) Paul Romer
Ans: E

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Difficulty: Easy
32. Assume India's income level is now roughly 5% of that of the United States. Assuming there
is no change in the savings rates and the levels of technology of these two countries, how
many years will it take for India to reach 10% of the U.S.'s income level?
A) 10
B) 20
C) 25
D) 35
E) 50
Ans: D

Difficulty: Medium
33. The notion of conditional convergence states that two countries that have the same
population growth and access to the same level of technology will reach a steady-state
equilibrium at
A) different levels of output but the same growth rate, if their savings rates are different
B) different levels of output and different economic growth rates if their savings rates are
different
C) the same level of output and the same economic growth rate, even if their savings rates are
different
D) the same level of output but different economic growth rates if their savings rates are
different
E) the same level of output and the same economic growth rate if their savings rates are the
same but their rates of depreciation differ
Ans: A

Difficulty: Medium
34. Which of the following is NOT an important factor in establishing high growth in GDP per
capita for a country?
A) a stable monetary growth rate
B) a high savings rate
C) low population growth
D) a predictable economic and political environment
E) policies to encourage industries to compete in world markets
Ans: A

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Difficulty: Easy
35. Which of the following policy options is likely to be most successful in getting a poor
country out of the poverty trap?
A) expansionary fiscal policy
B) expansionary monetary policy
C) labor market policies
D) programs to limit population growth
E) investment subsidies
Ans: D

Difficulty: Easy
36. Countries can achieve continued economic growth as long as
A) technological advances continue
B) educational progress continues
C) intelligent resource management is practiced
D) all of the above
E) only A) and B)
Ans: D

Difficulty: Easy
37. Robert Barro's empirical findings that countries with higher levels of investment will achieve
a steady state with a higher per-capita income but not with a higher growth rate supports
A) the notion of absolute convergence
B) the notion of conditional convergence
C) the predictions of the endogenous growth theory
D) the belief that a high savings rate is not beneficial for any nation
E) the belief that technology is not very important
Ans: B

Difficulty: Medium
38. Developed countries that direct their investment towards physical capital rather than research
and development can expect to
A) have a higher level of output in the short run and a higher long-run growth rate
B) have a lower level of output in the short run and lower long-run growth rate
C) have a lower level of output in the short run but a higher long-run growth rate
D) have a higher level of output in the short run but a lower long-run growth rate
E) achieve A) but only if the level of investment exceeds 1/3 of GDP
Ans: D

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Difficulty: Easy
39. For a developing country that wants to increase its stock of real capital fairly quickly, which
of the following is NOT a valid option?
A) implementing policies designed to increase educational levels
B) asking foreign firms for direct investments in the country
C) borrowing funds from the World Bank for real capital investments
D) asking other countries for foreign aid to buy new machines
E) increasing private domestic saving
Ans: A

Difficulty: Easy
40. Roughly how many years will it take a country that grows at an average rate of 2% per year
to double the size of its GDP?
A) 100
B) 50
C) 35
D) 20
E) 15
Ans: C

Difficulty: Easy
41. If two countries have the same share of investment to GDP, the one that experiences a faster
growth rate is most likely the one that
A) emphasizes free market policies and encourages foreign trade
B) protects domestic industry from foreign competition with trade barriers
C) invests less in government infrastructure
D) has a higher share of government spending to GDP
E) has more government regulations and spends more funds to protect the environment
Ans: A

Difficulty: Easy
42. Which of the following countries is NOT one of the "Asian Tigers"?
A) Hong Kong
B) Japan
C) Singapore
D) South Korea
E) Taiwan
Ans: B

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Difficulty: Easy
43. The "Asian Tigers" achieved high economic growth from 1966 to 1990 in part because they
A) had very high savings rates
B) successfully controlled their population growth
C) devoted many resources to education
D) both B) and C)
E) both A) and C)
Ans: C

Difficulty: Medium
44. Which of the following was NOT a common element contributing to the growth of the four
"Asian Tigers" between 1966 and 1990?
A) an increase in the labor force participation rate
B) high educational achievement
C) a high savings rate
D) emphasis on laissez-faire economics
E) an increase in total factor productivity achieved by higher levels of inputs
Ans: D

Difficulty: Easy
45. Between 1966 and 1990, all four "Asian Tigers" achieved economic growth mostly through
A) hard work and sacrifice
B) protecting domestic industries through tariffs
C) substantially increasing growth in total factor productivity
D) controlling population growth
E) a large degree of government intervention
Ans: A

Difficulty: Medium
46. Hong Kong and Singapore achieved high economic growth between 1966 and 1990. Which
of the following characteristics did these two countries NOT have in common?
A) a fairly stable government
B) a very low degree of government intervention
C) industries were encouraged to export and compete in world markets
D) increases in labor force participation rates
E) great investments in human capital
Ans: B

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Difficulty: Easy
47. The four "Asian Tigers" achieved high economic growth between 1960 and 1990 since they
A) initially protected domestic firms, but then exposed them to foreign competition
B) had very high savings rates
C) had large increases in the labor force participation rates of women
D) increased inputs substantially, although total factor productivity did not increase substantially
E) all of the above
Ans: E

Difficulty: Easy
48. Between 1966 and 1990 Singapore's GDP per capita grew at an average annual rate of 6.8%.
During the same time frame its growth rate in total factor productivity was
A) 0.2%
B) 1.2%
C) 2.2%
D) 3.2%
E) 4.2%
Ans: A

Difficulty: Medium
49. Between 1966 and 1990 Hong Kong experienced a much higher growth rate of output than
Singapore. This was at least partially due to the fact that Singapore had a government that
A) emphasized a laissez-faire attitude towards market activities
B) maintained much tighter control over market activities
C) discouraged a rapid pace of foreign investment in new technology
D) imposed strict population control programs
E) none of the above
Ans: B

Difficulty: Medium
50. There is no simple relationship between the proportion of investment to output and the
growth rate of per-capita output since
A) population growth rates differ among countries
B) income growth rates differ among countries
C) the efficiency of investment among countries can vary widely
D) the savings rates among countries can vary widely
E) none of the above
Ans: C

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