1.

The Solow growth model describes:

A.

how output is determined at a point in time.

B.

how output is determined with fixed amounts of capital and labor.

C.

how saving, population growth, and technological change affect output over time.

D.

the static allocation, production, and distribution of the economy's output.



2.

In the Solow growth model, the assumption of constant returns to scale means that:

A.

all economies have the same amount of capital per worker.

B.

the steady-state level of output is constant regardless of the number of workers.

C.

the saving rate equals the constant rate of depreciation.

D.

the number of workers in an economy does not affect the relationship between output per worker and capital per worker.



3.

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the line denotes:

A.

output per worker.

B.

output per unit of capital.

C.

the marginal product of labor.

D.

the marginal product of capital.



4.

The consumption function in the Solow model assumes that society saves a:

A.

constant proportion of income.

B.

smaller proportion of income as it becomes richer.

C.

larger proportion of income as it becomes richer.

D.

larger proportion of income when the interest rate is higher.



5.

In the Solow growth model of Chapter 7, where s is the saving rate, y is output per worker, and i is investment per worker, consumption per worker (c) equals:

A.

sy

B.

(1 -s)y

C.

(1 + s)y

D.

(1 - s)y - i



6.

Investment per worker (i) as a function of the saving ratio (s) and output per worker (f(k)) may be expressed as:

A.

s + f(k).

B.

s - f(k).

C.

sf(k).

D.

s/f(k).



7.

In the Solow model, it is assumed that a(n) ______ fraction of capital wears out as the capital-labor ratio increases.

A.

smaller

B.

larger

C.

constant

D.

increasing



8.

In the steady state, the capital stock does not change because investment equals:

A.

output per worker.

B.

the marginal product of capital.

C.

depreciation.

D.

consumption.



Exhibit: Capital-Labor Ratio and the Steady State

Ref 7-2


9.

(Exhibit: Capital-Labor Ratio and the Steady State) In this graph, capital-labor ratio k2 is not the steady-state capital-labor ratio because:

A.

the saving rate is too high.

B.

the investment ratio is too high.

C.

gross investment is greater than depreciation.

D.

depreciation is greater than gross investment.



10.

In the Solow growth model, if investment is less than depreciation, the capital stock will ______ and output will ______ until the steady state is attained.

A.

increase; increase

B.

increase; decrease

C.

decrease; decrease

D.

decrease; increase



11.

If the national saving rate increases, the:

A.

economy will grow at a faster rate forever.

B.

capital-labor ratio will increase forever.

C.

economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.

D.

capital-labor ratio will eventually decline.



12.

Examination of recent data for many countries shows that countries with high saving rates generally have high levels of output per person because:

A.

high saving rates mean permanently higher growth rates of output.

B.

high saving rates lead to high levels of capital per worker.

C.

countries with high levels of output per worker can afford to save a lot.

D.

countries with large amounts of natural resources have both high output levels and high saving rates.



13.

The Golden Rule level of capital accumulation is the steady state with the highest level of:

A.

output per worker.

B.

capital per worker.

C.

savings per worker.

D.

consumption per worker.



14.

In an economy with no population growth and no technological change, steady-state consumption is at its greatest possible level when the marginal product of:

A.

labor equals the marginal product of capital.

B.

labor equals the depreciation rate.

C.

capital equals the depreciation rate.

D.

capital equals zero.



15.

The Golden Rule level of the steady-state capital stock:

A.

will be reached automatically if the saving rate remains constant over a long period of time.

B.

will be reached automatically if each person saves enough to provide for his or her retirement.

C.

implies a choice of a particular saving rate.

D.

should be avoided by an enlightened government.



16.

If an economy is in a steady state with no population growth or technological change and the capital stock is above the Golden Rule level and the saving rate falls:

A.

output, consumption, investment, and depreciation will all decrease.

B.

output and investment will decrease, and consumption and depreciation will increase.

C.

output and investment will decrease, and consumption and depreciation will increase and then decrease but finally approach levels above their initial state.

D.

output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.



17.

When an economy begins above the Golden Rule, reaching the Golden Rule:

A.

produces lower consumption at all times in the future.

B.

produces higher consumption at all times in the future.

C.

requires initially reducing consumption to increase consumption in the future.

D.

requires initially increasing consumption to decrease consumption in the future.



18.

The formula for the steady-state ratio of capital to labor (k*) with population growth at rate n but no technological change, where s is the saving rate, is s:

A.

divided by the sum of the depreciation rate plus n.

B.

multiplied by the sum of the depreciation rate plus n.

C.

divided by the product of f(k*) and the sum of the depreciation rate plus n.

D.

multiplied by f(k*) divided by the sum of the depreciation rate plus n.



19.

In the Solow growth model of an economy with population growth but no technological change, if population grows at rate n, total output grows at rate ______ and output per workers grows at rate ______.

A.

n ; n

B.

n ; 0

C.

0 ; 0

D.

0 ; n



20.

The Solow model with population growth but no technological change cannot explain persistent growth in standards of living because:

A.

total output does not grow.

B.

depreciation grows faster than output.

C.

output, capital, and population all grow at the same rate in the steady state.

D.

capital and population grow, but output does not keep up.




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