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Testbank Chapter 8: Economic Growth II

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Description Question pool for Testbank Chapter 8: Economic Growth II

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Question
The efficiency of labor is a term that does not reflect the:
Answer

high output that comes from labor cooperating with a large amount of capital.
health of the labor force.
education of the labor force.
skills of the labor force acquired through on-the-job training.
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The efficiency of labor:
Answer

is the marginal product of labor.

is the rate of growth of the labor force.
includes the knowledge, health, and skills of labor.
equals output per worker.
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The number of effective workers takes into account the number of workers and the:
Answer

amount of capital available to each worker.

rate of growth of the number of workers.
efficiency of each worker.
saving rate of each worker.
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Question
The rate of labor-augmenting technological progress (g) is the growth rate of:
Answer

labor.
the efficiency of labor.
capital.
output.
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Assuming that technological progress increases the efficiency of labor at a constant rate is called:

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Answer

endogenous technological progress.

the efficiency-wage model of economic growth.
labor-augmenting technological progress.
the Golden Rule model of economic growth.
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Question
If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then
the number of effective workers is growing at a rate of:
Answer

2 percent.
3 percent.
5 percent.
6 percent.
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Question
In a steady-state economy with a saving rate s, population growth n, and labor-augmenting technological progress g,
the formula for the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f(k*)),
is (denoting the depreciation rate by ):
Answer

sf(k)/( + n + g).
s/((f(k))( + n + g)).
f(k)/((s)( + n + g)).
(s f(k))/( + n + g).
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Question
In the Solow growth model with population growth and technological change, the break-even level of investment must
cover:
Answer

depreciating capital.
depreciating capital and capital for new workers.
depreciating capital and capital for new effective workers.
depreciating capital, capital for new workers, and capital for new effective workers.
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Question
In the Solow growth model, the steady-state growth rate of output per effective worker is ______, and the steady-state
growth rate of output per actual worker is ______.
Answer

the sum of the rate of technological progress plus the rate of population growth; zero
zero; the rate of technological progress
zero; zero
the rate of technological progress; the rate of population growth
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In the Solow growth model with population growth and technological change, the steady-state growth rate of income
per person depends on:
Answer

the rate of population growth.

the saving rate.
the rate of technological progress.

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the rate of population growth plus the rate of technological progress.

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In a steady-state economy with population growth n and labor-augmenting technological progress g, persistent
increases in standard of living are possible because the:
Answer

capital stock grows faster than does the labor force.

capital stock grows faster than does the number of effective workers.
capital stock grows faster than does depreciation.
saving rate constantly increases.
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According to the Solow model, persistently rising living standards can only be explained by:
Answer

population growth.
capital accumulation.
saving rates.
technological progress.
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Question
In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:
Answer

output per worker.

output per effective worker.
consumption per worker.
consumption per effective worker.
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Question
With population growth at rate n and labor-augmenting technological progress at rate g, the Golden Rule steady state
requires that the marginal product of capital (MPK):
Answer

net of depreciation be equal to n + g.

net of depreciation be equal to the depreciation rate plus n + g.
plus n be equal to the depreciation rate plus g.
plus g be equal to the depreciation rate plus n.
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Question
In the Solow model with technological progress, the steady-state growth rate of capital per effective worker is:
Answer

0.

g.
n.
n + g.
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Question
In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows
at a 3 percent rate, then in the steady state, output per effective worker grows at a ______ percent rate.
Answer

0
2
3
5
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Question
In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows
at a 3 percent rate, then in the steady state, output per actual worker grows at a ______ percent rate.
Answer

0
2
3
5
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In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows
at a 3 percent rate, then in the steady state, total output grows at a ______ percent rate.
Answer

0
2
3
5
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Question
In the Solow model with technological progress, the steady-state growth rate of output per effective worker is:
Answer

0.

g.
n.
n + g.
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Question
In the Solow model with technological progress, the steady-state growth rate of output per (actual) worker is:
Answer

0.

g.
n.
n + g.
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In the Solow model with technological progress, the steady-state growth rate of total output is:
Answer

0.

g.
n.

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n + g.
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Question
Over the past 50 years in the United States:
Answer

output per worker hour, capital stock per worker hour, the real wage, and the real rental price of capital
have all increased about 2 percent per year.
output per worker hour, the real wage, and the real rental price of capital have all increased about 2
percent per year, whereas capital stock per worker hour has increased faster.
output per worker hour and the real wage have both increased about 2 percent per year, whereas capital
stock per worker hour has increased faster and the real rental price of capital has remained about the
same.
output per worker hour, the real wage, and capital stock per worker hour have all increased about 2
percent per year, whereas the real rental price of capital has remained about the same.
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In the Solow model with technological progress, by increasing the efficiency of labor at rate g:
Answer

the real wage and the real rental price of capital both grow at rate g.
the real wage grows at rate g but the real rental price of capital is constant.
the real wage is constant but the real rental price of capital grows at rate g.
both the real wage and the real rental price of capital are constant.
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Question
The balanced-growth property of the Solow growth model with population growth and technological progress predicts
which of the following sets of variables will grow at the same rate in the steady state?
Answer

output per effective worker, capital per effective worker, real wage
output per worker, capital per worker, real wage
real rental price of capital, real wage, output per worker
capital-output ratio, output per worker, capital per worker
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The Solow model predicts that two economies will converge if the economies start with the same:
Answer

capital stocks.
populations.
steady states.
production functions.
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Conditional convergence occurs when economies converge to:
Answer

the same steady state as other economies.

the Golden Rule steady state.
the balanced-growth steady state.
their own, individual steady states.
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Question
International data suggest that economies of countries with different steady states will converge to:
Answer

the same steady state.

their own steady state.
the Golden Rule steady state.
steady states below the Golden Rule level.
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Question
If two economies are identical (including having the same saving rates, population growth rates, and efficiency of
labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy
with the smaller capital stock:
Answer

will be at a lower level than the steady state of the high capital economy.
will be at a higher level than the steady state of the high capital economy.
will be at the same level as the steady state of the high capital economy.
will be proportional to the ratio of the capital stocks in the two economies.
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If two economies are identical (with the same population growth rates and rates of technological progress), but one
economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower
saving rate:
Answer

will be at a lower level than the steady state of the high-saving economy.
will be at a higher level than the steady state of the high-saving economy.
will be at the same level as the steady state of the high-saving economy.
will grow at a slower rate than the high-saving economy.
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Question
Empirical investigations into whether differences in income per person are the result of differences in the quantities of
the factors of production available or differences in the efficiency with which the factors are employed typically find:
Answer

a negative correlation between the quantity of factors and the efficiency of use.
a positive correlation between the quantity of factors and the efficiency of use.
no correlation between the quantity of factors and the efficiency of use.
large gaps between the quantity of factors accumulated and the efficiency of use.
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Question
Hypotheses to explain the positive correlation between factor accumulation and production efficiency include each of
the following except:
Answer

the quality of a nation's institutions influences both factor accumulation and production efficiency.
capital accumulation causes greater production efficiency.
efficient economies make capital accumulation unnecessary.
an efficient economy encourages capital (including human capital) accumulation.
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Question
International differences in income per person in accounting terms must be attributed to differences in either ______
and/or ______.
Answer

factor accumulation; production efficiency

constant returns to scale; the marginal product of capital
unemployment rates; depreciation rates
consumption; interest rates
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Differences in factor accumulation and/or differences in production efficiency must account for all international
differences in:
Answer

human capital and physical capital.

saving rates and population growth rates.
income per person.
labor efficiency.
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Question
The preponderance of empirical evidence supports the hypothesis that economies that are open to trade ______ than
comparable closed economies.
Answer

grow more rapidly

have lower steady-state levels of income per worker due to foreign competition
have faster rates of population growth and technological progress
converge more slowly to a steady-state equilibrium
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Question
Empirical evidence supports the theory that free trade:
Answer

increases economic growth.

decreases economic growth.
increases imports, but decreases exports because of greater global competition.
increases both imports and exports, but does not contribute to overall economic growth.
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Question
If the marginal product of capital net of depreciation equals 8 percent, the rate of growth of population equals 2
percent, and the rate of labor-augmenting technical progress equals 2 percent, to reach the Golden Rule level of the
capital stock the ______ rate in this economy must be ______.
Answer

saving; increased
population growth; decreased
depreciation; decreased
total output growth; decreased
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Question
If the marginal product of capital net of depreciation equals 10 percent and the rate of population growth equals 2
percent, then this economy will be at the Golden Rule steady state if the rate of technological progress equals _____
percent.

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Answer

0
2
8
10
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Question
Which of the following changes would bring the U.S. capital stock, currently below the Golden Rule level, closer to the
steady-state, consumption-maximizing level?
Answer

increasing the population growth rate

increasing the rate of capital depreciation
increasing the rate of technological progress
increasing the saving rate
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Question
The analysis in Chapter 8 of the current capital stock in the United States versus the Golden Rule level of capital
stock shows that the capital stock in the United States is:
Answer

well above the Golden Rule level.

about equal to the Golden Rule level.
well below the Golden Rule level.
slightly above the Golden Rule level.
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Other things being equal, all of the following government policies are likely to increase national saving except:
Answer

decreasing taxes on savings accounts.

running a budget deficit.
running a budget surplus.
retiring part of the national debt.
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Economic research shows that ______ in explaining international differences in living standards.
Answer

physical capital is more important than is human capital

human capital is at least as important as is physical capital
human capital is much more important than is physical capital
infrastructure is the most important factor
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A possible externality associated with the process of accumulating new capital is that:
Answer

a reduction in labor productivity may occur.

new production processes may be devised.
old capital may be made more productive.
the government may need to adopt an industrial policy.
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Question
English-style legal systems give ______ protections to shareholders and creditors than French Napoleonic Codes,
typically resulting in ______ capital markets and faster rates of economic growth.
Answer

greater; more developed

greater; more corrupt
less; more developed
less; less corrupt
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Question
The type of legal system in a country and the level of corruption in a country have been found to be:
Answer

unrelated to the rate of economic growth in a country.

significant determinants of the rate of economic growth in a country.
important topics for political discussion, but not economic explanations of growth.
important variables explaining the Golden Rule level of capital.
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Question
One explanation for greater economic development in moderate versus tropical climates is that institutions
established by colonial settlers in moderate climates ______, while institutions established by colonists in tropical
climates ______.
Answer

were based on English common law; were based on the Napoleonic Code
were based on the Napoleonic Code; were based on English common law
protected property rights; were extractive and authoritarian
were extractive and authoritarian; protected property rights
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Public policies in the United States designed to stimulate technological progress do not include:
Answer

tax breaks to encourage homeownership.

the temporary monopoly granted by the patent system.
tax breaks for research and development.
subsidies given by the National Science Foundation.
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Question
The recent worldwide slowdown in economic growth began in the early:
Answer

1960s.
1970s.
1980s.
1990s.
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Question
If productivity growth in the United States had remained at its level before the recent productivity slowdown, real
income today would be more than ______ percent higher.

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Answer

10
20
30
40
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The productivity slowdown that began in the 1970s has been attributed, at least partly, to each of the following except:
Answer

running out of new ideas about how to produce.

a deterioration in the quality of education.
a decline in the number of workers in the labor force.
a lower average level of experience among workers.
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Question
Increases in the rate of growth of income per person in the United States in the mid-1990s was most likely the result
of:
Answer

increases in human capital.

increases in physical capital.
advances in information technology.
an increase in the saving rate.
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Question
Endogenous growth theory rejects the assumption of exogenous:
Answer

production functions.
rates of depreciation.
population growth rates.
technological change.
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Question
In the Solow growth model, technological change is ______, whereas in endogenous growth theories, technological
change is ______.
Answer

assumed; explained
explained; assumed
persistent; constant
constant; persistent
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Question
In the Solow growth model, capital exhibits ______ returns. In a basic endogenous growth model, capital exhibits
______ returns.
Answer

constant; diminishing
constant; constant
diminishing; constant
diminishing; diminishing
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Question
In the basic endogenous growth model, income can grow forevereven without exogenous technological progress
because:
Answer

the saving rate equals the rate of depreciation.

the saving rate exceeds the rate of depreciation.
capital does not exhibit diminishing returns.
capital exhibits diminishing returns.
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Question
The endogenous growth model's assumption of constant returns to capital is more plausible if capital is defined to
include:
Answer

plant and equipment.

knowledge.
depreciation.
technology.
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Question
If Y is output, K is capital, u is the fraction of the labor force in universities, L is labor, and E is the stock of knowledge,
and the production Y = F(K,(1 u) EL) exhibits constant returns to scale, then output (Y) will double if:
Answer

K is doubled.
K and u are doubled.
K and E are doubled.
L is doubled.
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Question
In the two-sector endogenous growth model, the saving rate (s) affects the steady-state:
Answer

level of income.
growth rate of income.
level of income and growth rate of income.
growth rate of the stock of knowledge.
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In the two-sector endogenous growth model, the fraction of labor in universities (u) affects the steady-state:
Answer

level of income.
growth rate of income.
level of income and growth rate of income.
level of income, growth rate of income, and growth rate of the stock of knowledge.
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In the two-sector endogenous growth model, income growth persists because:

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the production function shifts exogenously.

the saving rate exceeds the rate of depreciation.
the creation of knowledge in universities never slows down.
the fraction of the labor force in universities is large.
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Question
In the two-sector endogenous growth model, the steady-state stock of physical capital is determined by ______ and
the growth in the stock of knowledge is determined by ______.
Answer

the fraction of labor in universities; the saving rate

the efficiency of labor; the saving rate
the production function; the efficiency of labor
the saving rate; the fraction of labor in universities
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Empirical studies indicate that the rate of social return from positive standing on shoulders externalities of research
______ the negative stepping on toes externalities of research.
Answer

greatly exceed
approximately equal
are substantially less than
are only slightly less than
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Empirical results justify substantial government subsidies to research based on the finding that the private return to
research is:
Answer

greater than the social return to research.

approximately equal to the social return to research.
less than the social return to research.
positive, but the social return to research is negative.
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Question
Schumpeter's thesis of creative destruction is an explanation of economic progress resulting from:
Answer

using up scarce natural resources to create new products.

breaking down barriers to trade and development.
new product producers driving incumbent producers out of business.
creating new methods to destroy the environment.
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When capital increases by K units, output increases by:
Answer

L units.

MPL L units.
K units.
MPK K units.
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When capital increases by K units and labor increases by L units, output (Y) increases by:
Answer

K + L units.

MPL + MPK units.

(MPK K) + (MPL L) units.
(MPL K) + (MPK K) units.
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If capital grows at 3 percent per year and labor grows at 1 percent per year, and capital's share is 1/3 while labor's
share is 2/3, if there is no technological progress and the neoclassical assumptions hold, the growth rate of output will
be:
Answer

1-1/3 percent per year.

1-2/3 percent per year.
3 percent per year.
2-1/3 percent per year.
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Total factor productivity may be measured by:
Answer

subtracting the rate of growth of capital input and the rate of growth of labor input from the rate of growth
of output.
subtracting the rate of growth of capital input, multiplied by capital's share of output, plus the rate of
growth of labor input, multiplied by labor's share of output, from the rate of growth of output.
adding the rate of growth of capital input to the rate of growth of labor input.
adding the rate of growth of capital input, multiplied by capital's share of output, to the rate of growth of
labor input, multiplied by labor's share of output.
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Changes that can increase measured total factor productivity include:
Answer

increased expenditures on education.

regulations requiring reductions in pollution.
regulations requiring increases in worker safety.
increases in the capital-labor ratio.
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The Solow residual measures the portion of output growth that cannot be explained by growth in:
Answer

capital and labor.

technology.
the money supply.
the saving rate.
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Prescott interpreted fluctuations in the Solow residual as evidence that:

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technology shocks are an important source of short-run economic fluctuations.

the Solow growth model does not converge to a steady-state equilibrium.
endogenous growth models are better explanations of growth than the Solow model.
the marginal product of labor fluctuates more than the marginal product of capital.
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An alternative to Prescott's explanation of the cyclical behavior of the Solow residual is that it is the result of:
Answer

labor hoarding in recession and cyclical mismeasurement of output.

bad weather, strict environmental regulations, and oil shocks.
declines in capital utilization and labor force participation.
technology shocks.
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Labor hoarding refers to:
Answer

keeping workers in low-wage jobs in order to reduce labor costs.

using less capital in production so that more workers will have jobs.
continuing to employ workers during a recession to ensure they will be available in the recovery.
contractually preventing workers from obtaining jobs with competing firms.
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The Solow residual equals the percentage change in output:
Answer

plus the percentage change in inputs.

minus the percentage change in prices.
minus the percentage change in inputs.
plus the percentage change in costs.
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Question
The Solow residual will fall even if technology has not changed if there is:
Answer

population growth.
endogenous growth.
labor hoarding.
balanced growth.
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Question
A recent study suggests that the spectacular growth rates experienced by Hong Kong, Singapore, South Korea, and
Taiwan are largely due to:
Answer

rapid growth in total factor productivity.

increases in factor inputs.
high rates of saving.
low rates of capital depreciation.
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Question
1/2

If the production function is y = k , the steady-state value of y is:

Answer

y = ((s + g)/( + n))1/2.

y = (s + g)/( + n).
y = (2/( + n + g))1/2.
y = s/( + n + g).
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If the U.S. production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per year,
depreciation is 4 percent per year, and the capital-output ratio is 2.5, the saving rate that is consistent with
steady-state growth is:
Answer

12.5 percent.
14 percent.
17.5 percent.
20 percent.
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Question
In a steady state with population growth and technological progress:
Answer

the capital share of income increases.

the labor share of income increases.
in some cases the capital share of income increases and sometimes the labor share increases.
the capital and labor shares of income are constant.
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In a steady state with population growth and technological progress:
Answer

the real rental price of capital is constant and the real wage grows at the rate of technological progress.
the real rental price of capital grows at the rate of technological progress and the real wage is constant.
both the real rental price of capital and the real wage grow at the rate of technological progress.
both the real rental price of capital and the real wage are constant.
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In comparing two countries with different levels of education but the same saving rate, rate of population growth, and
rate of technological progress, one would expect the more highly educated country to have:
Answer

a higher growth rate of total income and a higher real wage.

a higher growth rate of total income and the same real wage.
the same growth rate of total income and a higher real wage.
the same growth rate of total income and the same real wage.
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If the per-worker production function is y = Ak, where A is a positive constant, then the marginal product of capital:
Answer

increases as k increases.
is constant as k increases.
decreases as k increases.

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cannot be measured in this case.

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If the per-worker production function is y = Ak, where A is a positive constant, in the steady state, a:
Answer

lower saving rate does not affect the growth rate.

higher saving rate does not affect the growth rate.
lower saving rate leads to a higher growth rate.
higher saving rate leads to a higher growth rate.
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Question
2/3 1/3

If the production function is Y = AK L in the land of Solovia, and the labor force increases by 5 percent while
capital is constant, labor productivity will:
Answer

increase by 3.33 percent.

increase by 1.67 percent.
decrease by 1.67 percent.
decrease by 3.33 percent.
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Question
In year 1, capital stock was 6, labor input was 3, and output was 12. In year 2, capital was 7, labor was 4, and output
was 14. If shares of labor and capital were each 1/2, between the two years, total factor productivity:
Answer

increased by 1/12.
increased by 1/18.
decreased by 1/12.
decreased by 1/18.
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Question
The rate of growth of labor productivity (Y/L) may be expressed as the rate of growth of total factor productivity:
Answer

plus the capital share multiplied by the rate of growth of the capital-labor ratio.
minus the capital share multiplied by the rate of growth of the capital-labor ratio.
plus the rate of growth of capital productivity.
minus the rate of growth of capital productivity.
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Question
Assume that an economy described by the Solow model is in a steady state with output and capital growing at 3
percent, labor growing at 1 percent, and technological progress growing at 2 percent. The capital share is 0.3. The
growth-accounting equation indicates that the contributions to growth of capital, labor, and total factor productivity are:
Answer

0 percent, 1 percent, and 2 percent, respectively.

0.3 percent, 0.7 percent, and 2 percent, respectively.
0.9 percent, 0.7 percent, and 1.4 percent, respectively.
1.8 percent, 0.3 percent, and 0.9 percent, respectively.
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Question
0.3 0.7

Assume that a country's production function is Y = AK L . The ratio of capital to output is 3, the growth rate of
output is 3 percent, and the depreciation rate is 4 percent. Capital is paid its marginal product.
a.
What is the marginal product of capital in this situation? (Hint: The marginal
product of capital may be computed using calculus by differentiating the
production function and using the capital-output ratio or by using the fact that
capital's share equals MPK multiplied by K divided by Y.)
b.

If the economy is in a steady state, what must be the saving rate? (Hint: The
saving rate multiplied by Y must provide for gross growth of ( + n + g)K, where
is the depreciation rate.)

c.

If the economy decides to achieve the Golden Rule level of capital and actually
reaches it, what will be the marginal product of capital?

d.

What must the saving rate be to achieve the Golden Rule level of capital?
a. MPK = 0.10.
b. s = 0.21.
c. MPK = 0.07.
d. s = 0.30.

Answer

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Exhibit: Factors of Production Data

Share of Labor in
Output

100

200

100

0.5

106

205

102

0.5

111

210

104

0.5

110.5

215

104

0.5

Period

5
110
220
104
0.5
Use the data in the exhibit to complete a and b.
a.
Compute and report the value of growth in total factor productivity
((A A )/A ) in each period from periods 2 through 5. If the value of A is
t

t1

t1

1.000 in period 1, also report the value of A in each period.

b.

Does the value of A rise in each period? If it declines, do you think this decline
is because technological progress works backwards? If so, explain your
answer. If not, provide another explanation.

Answer a. Growth in A is equal to plus 3.75 percent, plus 2.52 percent, minus 1.64 percent, and minus 1.62 percent
in periods 2 through 5. The values of A in the five periods are 1.0000, 1.0375, 1.0636, 1.046, and 1.0293.
b. A does not rise in each period. Many explanations are possible, but one explanation is that the economy
goes into a recession (output drops in periods 4 and 5) and management hoards labor instead of laying
workers off.
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The Solow model with population growth and labor-augmenting technological progress predicts balanced growth in
the steady state. Growth rates of which variables are predicted to be balanced (i.e., will be equal) in the steady state?
Answer Output per worker, capital per worker, and the real wage will all grow at rate g, the growth rate of
technological progress in the steady state. Output per effective worker, capital per effective worker, the
capital-output ratio, and the real rental return on capital will all be constant in the steady state.
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What is the difference between convergence and conditional convergence with respect to predictions of the Solow
growth model? Explain.

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Answer Convergence applies to economies with the same saving rate, population growth rate, depreciation rate, rate
of technological progress, and production function. These economies will converge to the same steady state
according to the Solow growth model with the same levels of output per worker, capital per worker, and
growth rates (even if the levels were initially different). Conditional convergence applies to economies with
different saving rates, population growth rates, depreciation rates, rates of technological progress, and/or
production functions. These economies will move to different steady-state equilibria with different levels of
output per worker, capital per worker, and growth rates determined by the key variables.
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Question
Explain why additional capital generates both positive and negative impacts on steady state consumption per worker
in the Solow model with population growth and technological change.
Answer Increasing the capital per effective worker ratio increases output available for consumptiona positive
impact on consumption per worker. Increasing the capital per effective worker ratio requires that more of the
additional output be devoted to investment in order to replace a larger depreciating capital stock and to equip
a growing work force of effective workers with the higher ratio of capital per effective workera negative
impact on consumption per worker.
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Suggest three explanations for the productivity slowdown experienced between 1972 and 1995.
Answer Possible explanations include: mismeasurement of quality improvements, increases in oil prices, declines in
worker quality, and depletion of ideas.
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a. What is the Solow residual?
b. Compare Prescott's interpretation of the fluctuations of the Solow residual over the business cycle with more
standard explanations of these fluctuations.
Answer a. The Solow residual is the percentage change in total output minus the percentage change in inputs. It is a
measure of total factor productivity.
b. Prescott interprets the cyclical change in the Solow residual, decreasing in recessions and increasing in
expansions, as evidence that business cycles are the result of technological shocks. Critics of this
interpretation suggest that the Solow residual would decline during a recession without any change in
technology if there is labor hoarding during recessions and if a different type of output, which is more difficult
to measure, is produced during recessions.
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Question
Suppose a government is able to permanently reduce its budget deficit. Use the Solow growth model of Chapter 8 to
graphically illustrate the impact of a permanent government deficit reduction on the steady-state capital-labor ratio and
the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the
direction the curves shift.
Answer

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Suppose Congress passes significant tax cuts on household income but does not reduce spending, so that the
government budget deficit is larger. Use the Solow growth model of Chapter 8 to graphically illustrate the impact of the
tax cut on the steady-state capital-labor ratio and the steady-state level of output per worker. Be sure to label the: a.
axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the direction the curves shift.
Answer

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Suppose a government is able to impose controls that limit the number of children people can have. Use the Solow
growth model of Chapter 8 to graphically illustrate the impact of the slower rate of population growth on the
steady-state capital-labor ratio and the steady-state level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the
direction the curves shift.
Answer

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Suppose that technological change is not labor-augmenting, but affects only capital. Use the Solow growth model of
Chapter 8 to graphically illustrate the impact of the slower rate of technological change that increases the rate at
which capital wears out (the rate of depreciation increases) on the steady-state capital-labor ratio and the steady-state
level of output per worker.
Be sure to label the: a. axes; b. curves; c. initial steady-state levels; d. terminal steady-state levels; and e. the
direction the curves shift.
Answer

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Question
Two countries, Highland and Lowland, are described by the Solow growth model. Both countries are identical, except
that the rate of labor-augmenting technological progress is higher in Highland than in Lowland.
a.
In which country is the steady-state growth rate of output per effective worker
higher?

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b.

In which country is the steady-state growth rate of total output higher?

c.

Does the Solow growth model predict that the two economies will converge to
the same steady state?

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Answer a. The steady-state growth rate of output per effective worker is zero in both countries.
b. The steady-state growth rate of total output will be higher in Highland because of the higher rate of
technological progress.
c. No, the Solow growth model predicts that the economies will converge to different steady states because
they have different rates of technological progress.
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Question
Based on the Solow growth model with population growth and labor-augmenting technological progress, explain how
each of the following policies would affect the steady-state level and steady-state growth rate of total output per
person:
a.
a reduction in the government's budget deficit
b.

grants to support research and development

c.

tax incentives to increase private saving

d.

greater protection of private property rights

Answer a. The reduction in the budget deficit increases the saving rate, which will increase the steady-state level of
output per person, but not alter the steady-state growth rate of output per person.
b. Grants to support research and development may improve the rate of technological progress, which will
increase the steady-state level and growth rate of output per person.
c. Greater private saving increases the saving rate, which will increase the steady-state level of output per
person, but not alter the steady-state growth rate of output per person.
d. Greater protection of property rights may be an institutional improvement that improves the rate of
technological progress, which will increase the steady-state level and growth rate of output per person.
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Explain how the Solow growth model differs from models of endogenous growth with respect to:
a.
the sources of technological progress.
b.

returns to capital.

Answer a. The Solow growth model assumes technological growth exists, while endogenous growth models try to
explain where technological progress comes from.
b. The Solow model assumes diminishing returns to capital, while endogenous growth models assume
constant returns to capital.
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Income per person exceeds $25,000 in many countries, but is below $1,000 per person in many other countries.
Based on the Solow growth model, suggest at least four possible explanations for this gap in living standards.
Answer Possible explanations include, richer countries have higher saving rates, lower population growth rates, lower
capital-depreciation rates, higher rates of technological progress, or institutions that better facilitate economic
growth.
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The economy of Macroland can be described by the Solow growth model. In Macroland the labor force grows at 3
percent per year, labor-augmenting technology increases at 2 percent per year, the saving rate is 15 percent per year,
and the rate of capital depreciation is 10 percent per year. Choosing from among the following variables: output per
effective worker, output per worker, total output, labor force, capital per worker, and capital per effective worker, which
variables will be growing at a:
a.
2 percent rate?

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b.

3 percent rate?

c.

5 percent rate?

d.

0 percent rate?

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Answer

a. output per worker, capital per worker

b. labor force
c. total output
d. output per effective worker, capital per effective worker
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