Rob Hartwell, CFA, is a portfolio manager whose client base is primarily comprised of high net worth individuals.

Hartwell has been hired by Joan McCarthy, a highly successful entrepreneur who has recently retired from her position as CEO of her company. Prior to the retention of Hartwell, McCarthys portfolio had been poorly managed by another investment advisor who had never formulated an investment policy for her and had invested Hartwells money in assets that were not particularly suitable for either her risk tolerance or her return requirements. One of Hartwells first tasks as McCarthys new portfolio manager is to formulate an investment policy for McCarthy in light of her new retirement status, taking into account her current and future needs for income-generating investment vehicles. Hartwell will then evaluate all current holdings and determine, on an individual basis and with regards to the portfolio as a whole, whether each position should be retained or liquidated. Hartwell identifies two large positions in companies located in Slotvenski, an Eastern European country that, until twenty years ago, was under communist rule. The investments are in two manufacturing concerns: one that produces paper products for domestic use, while the other manufactures leather goods for export to EU countries and the United States. Hartwell believes that the fundamental financial analysis of the two corporations should be relatively straightforward, but knows that he must first gain a firm understanding of the countrys economic climate in order to evaluate the investments in the context of the overall portfolio. Since the early 1990s, the government of Slotvenski has worked to replace its countrys formerly closed economy with a free market system with the hope of encouraging domestic economic growth. Policies were formulated specifically to create incentives for the countrys citizens to trade, invest and develop new technologies. As a result, over the past decade, the country has experienced a twenty percent increase in the growth rate of its labor productivity. In addition, over the same time period, the country has enjoyed an eight percent increase in the real GDP per labor hour. On the surface, both of these developments would appear to be of benefit to McCarthys investments in the developing country. Hartwell is impressed by Slotvenskis recent economic progress, but in light of McCarthys return parameters, he wants to do further analysis to attempt to determine whether or not this pattern of growth is sustainable in the future. He first will evaluate the countrys economic progress to determine which of the three predominant growth theories is most applicable to this situation. He observes that over the past decade, real interest rates have declined slightly, and Hartwell must determine what impact this may have on future economic growth. In his analysis, Hartwell also notes several demographic trends emerging in the countrys economy. Of particular interest to Harwell is the change in the composition of the countrys workforce. As the country has become more industrialized, more opportunities for women to enter the workforce have led to a slight decrease in the countrys birth rate. At the same time, increased disposable income per capita has led to an increased domestic demand for consumer goods.

An incentive system that will encourage a countrys economy to realize economic growth is composed of three main social institutions. Which of the following institutions must be present for a society to be able to create incentives for economic growth? A) Increased labor productivity. B) Establishment of property rights. C) Savings and investment in new capital. Property rights must be established to assure citizens and foreign investors alike that the government will never confiscate their savings and investments. With a proper incentive system in place, the economic growth of a country will least likely come from which of the following sources? A) The efficient exchange of goods and services. B) Investment in human capital. C) Increased savings and investment in new capital. A monetary system that allows for the efficient exchange of goods and services is an integral part of the incentive system that must exist in order for a country to realize economic growth. Investment in human capital, technological advancements, increased savings, and investment in new capital are the actual sources of economic growth. Which of the following statements regarding the growth rate of labor productivity is most accurate? A) Labor productivity can be quantified as capital per labor hour. B) Technological change is largely dependent upon growth in savings and investment in physical capital. C) The two factors that contribute to the growth of labor productivity are growth in physical capital per labor hour and technological change. Labor productivity is calculated by dividing real GDP by aggregate labor hours, and the two factors having the greatest influence on labor productivity are growth in physical capital per labor hour and technological change.

Assuming that the Slotvenski economy experiences a 6 percent increase in capital per labor hour, calculate the amount attributable to investment in new capital and the amount attributable to technological advancement. Investment in New Capital Advancement Technological Advancement A) 4.00% 2.00% B) 2.67% 5.33% C) 2.00% 4.00%

The one-third rule states that at a given level of technology, a one percent increase in capital per labor hour will result in a one third of one percent increase in real GDP per labor hour. Thus, capital per labor hour contributed 2 percent of the increase (1/3 6 percent) while technological change contributed the remaining 4 percent of the increase (2/3 6 percent). In accordance with the new growth theory, a decrease in real interest rates: A) will act as an incentive for people to discover new products and technology. B) will have little or no effect on population growth. C) is caused by an accumulation of capital, which will eventually stifle economic growth. Under the new growth theory, lower real interest rates will increase the drive to discover new products and technology in order to earn higher profits. The economic theory that argues that the most important economic influence on population growth in a society is the opportunity cost to women for entering the workplace is: A) neoclassical growth theory. B) new growth theory. C) classical growth theory.