ECO501 – Principles of Economics

Tutorial 8 – Topic 8 Economic Growth – Tutorial Questions

Part A – Multiple Choice Questions
1) The Classical macroeconomic model proposes that
A) government intervention is required to help the economy reach its potential.
B) real GDP equals potential GDP as long as inflation equals zero.
C) changes in the quantity of money are critical in driving economic growth.
D) markets work efficiently to produce the best macroeconomic outcomes.
E) socialism produces the most efficient economic outcomes for a society.

2) The Keynesian macroeconomic model states that

A) the economy is inherently unstable and government intervention is required to maintain
continued economic growth.
B) markets work efficiently to produce the best macroeconomic outcomes.
C) fluctuations in the quantity of money are responsible for most economic recessions.
D) changes in technology generate business cycles.
E) the economy is fairly stable.
3) The Monetarist model expands the Keynesian model by proposing that
A) decreases in the quantity of money lead to higher interest rates.
B) the government should lower taxes promote economic growth.
C) decreases in tax rates generate higher consumption.
D) decreases in the growth rate of the quantity of money trigger expansions by controlling inflation.
E) markets should be left alone to determine the optimal outcome.
4) The level of real GDP the economy produces at full employment is
A) nominal GDP.
B) potential GDP.
C) never reached in reality.
D) called the Lucas level.
E) real GDP.

5) Suppose that Australia has fully employed all of its resources. This situation means that
Australia
A) is operating at its potential GDP.
B) is growing at a faster rate than the United States.
C) has a negative Okun Gap.
D) has a positive Lucas Wedge.
E) is experiencing zero unemployment.

6) If the economy is fully employed, which of the following is true?

A) The price level equals 100.
B) Real and nominal GDP are equal.
C) Real and potential GDP are equal.
D) The unemployment rate is zero.
E) Real GDP cannot increase.

7) Potential GDP is the level of

A) real GDP that the economy would produce if it was at full employment.
B) nominal GDP that the economy would produce if it was at full employment.
C) real GDP that the economy would produce if there was no inflation.
D) nominal GDP that the economy would produce if there was no inflation.
E) real GDP that the economy would produce if there was no unemployment.
8) As an economic expansion approaches its peak, it is very likely that real GDP will
A) exceed nominal GDP.
B) exceed potential GDP.
C) equal nominal GDP but not potential GDP.
D) be less than potential GDP.
E) equal nominal GDP and equal potential GDP.

9) During a business cycle recession, it is very likely that real GDP will
A) exceed nominal GDP.
B) be less than potential GDP.
C) equal nominal GDP but not equal potential GDP.
D) equal nominal GDP and equal potential GDP.
E) be greater than potential GDP.

10) The production function describes the relationship between

A) the real wage and the quantity of labor supplied.
B) real GDP and the quantity of labor employed.
C) real and potential GDP.
D) real and nominal GDP.
E) potential GDP and the real wage rate.

11) According to the production function, as the quantity of labor employed increases, real GDP
increases
A) at an increasing rate.
B) at a decreasing rate.
C) at a constant rate.
D) and then eventually decreases.
E) until it reaches potential GDP, and then it no longer changes.

12) The above figure shows a nation's production function. Point A is

A) attainable if the economy is inefficient.
B) unattainable given the state of the economy.
C) attainable if the nation uses resources efficiently.
D) the maximum amount of real GDP the nation can produce.
E) the labor market equilibrium quantity of employment and real GDP.
 13) The above figure shows a nation's production function. Point B is
A) unattainable.
B) attainable if the nation uses resources inefficiently.
C) attainable if the nation uses resources efficiently.
D) the maximum amount of real GDP the nation can ever produce.
E) Both answers C and D are correct.
14) The above figure shows a nation's production function. Point B is ________ and ________
because ________.
A) attainable; efficient; the nation is using resources efficiently
B) attainable; inefficient; the nation is using resources inefficiently
C) unattainable; inefficient; the nation is using resources inefficiently
D) unattainable; inefficient; the nation is using resources efficiently but they could be more efficient
E) unattainable; efficient; the nation would be using resources efficiently if they could attain this level
of production

15) Suppose the price of a product is $4 and the nominal wage that the firm must pay is $20. Then
the firm's real wage is
A) $20.
B) $80.
C) $5.
D) $0.20.
E) $4.

16) The total labor hours that all the firms in the economy plan to hire during a given time period
at one particular real wage rate is the
A) demand for labor.
B) quantity of labor demanded.
C) supply of labor.
D) quantity of labor supplied.
E) quantity of jobs supplied.

17) If the real wage rate decreases from $14.00 per hour to $13.00 per hour, the
A) quantity demanded of labor increases.
B) demand for labor increases.
C) quantity supplied of labor increases.
D) supply of labor increases.
E) equilibrium quantity of employment must decrease.

18) An increase in the real wage rate ________ the quantity of labor demanded and ________ the
quantity of labor supplied.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) does not change; does not change

19) Which of the following statements is true?

A) According to the labor supply curve, as the real wage rises, employers are willing to provide more
jobs.
B) According to the labor supply curve, as the real wage rises, workers are willing to provide more
hours of labor.
C) According to the labor supply curve, as the real wage rises, employers are willing to provide fewer
jobs.
D) According to the labor supply curve, as the real wage rises, workers are willing to provide fewer
hours of labor.
E) According to the labor supply curve, as the real wage rises, more workers leave the labor force.

20) Households increase the quantity of labor supplied when the

A) real wage rate rises because the opportunity cost of not working falls.
B) nominal wage rate rises because the real wage rate must also rise.
C) real wage rate rises because the opportunity cost of not working rises.
D) nominal wage rate falls because the opportunity cost of not working rises.
E) income tax rises because an increase in the income tax increases the demand for labor.

21) As the real wage rate rises, the opportunity cost of

A) working rises.
B) saving rises.
C) leisure rises.
D) leisure falls.
E) buying goods and services rises.

22) The labor force participation rate

A) increases as the real wage increases.
B) decreases as the real wage increases.
C) has nothing to do with the real wage rate.
D) increases as the opportunity cost of working increases.
E) is one of the major reasons that firms pay efficiency wages.

23) The labor market is in equilibrium whenever

A) the nominal wage rate is decreasing.
B) the nominal wage rate is increasing.
C) the nominal wage rate is not changing.
D) the real wage rate is increasing.
E) the quantity of labor demanded equals the quantity of labor supplied.

24) Economic growth is a sustained expansion of production possibilities, as measured by the

increase in ________ over time.
A) real GDP
B) population
C) inflation
D) the price level
E) employment

25) A country will likely experience an increase in poverty if

A) its population decreases over time.
B) its real GDP growth rate decreases or slows over time.
C) its inflation rate decreases or slows over time.
D) its real GDP per person growth rate increases over time.
E) it does not receive foreign aid.

26) Suppose France's real GDP grew from $750 billion last year to $821 this year. What was the
growth rate of France's real GDP?
A) 10 percent
B) 9.5 percent
C) 9.1 percent
D) 8.6 percent
E) $71 billion

27) In 2008, real GDP in the United States was $13,312 billion. In 2009, real GDP in the United
States was $13,112 billion. What was the U.S. economic growth rate from 2008 to 2009?
A) -1.5 percent
B) 1.5 percent
C) 0.98 percent
D) 0.12 percent
E) $200 million

28) Using the data in the table above, the growth rate of real GDP for 2018 is equal to
A) 9.09 percent.
B) 7.00 percent.
C) 5.00 percent.
D) 4.76 percent.
E) 10.0 percent.

29) Using the data in the table above, real GDP per person in 2017 is
A) $70,000.
B) $71,429.
C) $75,000.
D) $70 trillion.
E) 7 percent.

30) Using the data in the table above, the growth rate of real GDP has
A) increased from year to year.
B) increased more rapidly from year to year.
C) remained constant from year to year.
D) slowed from year to year.
E) probably changed, but more information is needed about the price level to determine by how
much it has changed.

31) The population in the current year is 31.5 million and the real GDP is $814 million. The
previous year's statistics were a population of 31 million and a real GDP of $800 million. The
change in the standard of living, measured by growth in real GDP per person, is
A) 1.6 percent.
B) 7.75 percent.
C) 0.13 percent.
D) 6 percent.
E) 0 percent.
 32) Real GDP in the country of Oz is growing at 5 percent and its population is growing at 2
percent. In the country of Lilliput, real GDP is growing at 4 percent and its population is
growing at 0.5 percent. Thus,
A) real GDP per person in Oz is growing at a faster rate than in Lilliput.
B) real GDP per person in Lilliput is growing at a faster rate than in Oz.
C) real GDP per person in Lilliput is growing at the same rate as in Oz.
D) real GDP per person in Lilliput is growing at a rate that is not comparable to that in Oz.
E) We need more information to determine if real GDP per person in Lilliput is growing faster or
slower than real GDP per person in Oz.

33) Sustained increases in the standard of living depend on

A) increases in the quantity of labor.
B) increases in the population.
C) increases in aggregate hours.
D) increases in labor productivity.
E) decreases in labor productivity.

34) If real GDP is $6,460 billion, the population is 184.6 million people, and aggregate hours is 170
billion hours, labor productivity is
A) $2.63 an hour.
B) $2.86 an hour.
C) $35,000.
D) $38.00 an hour.
E) 920 hours.

35) Real GDP is $700 billion, average hours worked per week is 42 and aggregate hours 150
billion hours. What is the economy's labor productivity?
A) $1.80 per hour
B) $3.75 per hour
C) $16.67 per hour
D) $46.67 per hour
E) $4.50 per hour

36) If the stock of physical capital (that is machinery, equipment, etc.) and human capital remain
the same and the population increases, then
A) labor productivity will increase.
B) labor productivity will decrease.
C) the standard of living will increase.
D) the new labor will be more productive.
E) real GDP decreases.

37) Increases in human capital can come

A) only from formal schooling.
B) from employing more machinery.
C) only from on-the-job experience.
D) from formal education and on-the-job learning.
E) from nowhere because whatever human capital an individual possesses is what he or she was born
with.
 38) If aggregate hours are 100 billion hours and labor productivity is $40 an hour, than real GDP
equals
A) $100 billion.
B) $40 billion.
C) $100 trillion.
D) $2.5 trillion.
E) $4 trillion.

39) The presence of an incentive system that encourages growth

A) guarantees that growth will occur.
B) creates the right conditions for growth to occur.
C) cannot exist in poor countries.
D) existed even in hunter-gatherer societies.
E) means that the government must be a democracy.

40) A key reason why some nations show little or no growth is

A) overpopulation that overuses limited resources.
B) lack of incentives to undertake actions toward growth.
C) too much private property not directed by the government.
D) patents in rich nations that keep technology only for the rich.
E) too much international trade so that all economic growth spills over to foreigners.

41) Economic freedom requires

A) that there are no regulations and restrictions set on businesses and households by the government.
B) the rule of law and the ability to enforce the laws.
C) strong labor unions.
D) freedom to bribe government officials.
E) that the government be a democracy.

42) A reason why many of the third world countries are not achieving an increase in their
standard of living is that they
A) don't have enough natural resources.
B) don't have strong military power to force people to work harder.
C) don't have social institutions with a strong rule of law and economic freedom.
D) strongly encouraged international trade.
E) don't have a strong central government.

Part B – Discussion and Problem Solving Questions

1. Define potential GDP. Under what circumstances does actual real GDP fall short of potential
GDP, equal potential GDP, and exceed potential GDP?

2. The first table above gives the labor demand and labor supply schedules for a nation. The
second table gives its production function.
a. What is the equilibrium real wage rate and the level of employment?
b. What is potential GDP?

3. What are the sources of human capital?

4. Explain the productivity curve and how the components interact.

5. What does a productivity curve reflect? What leads to movements along a productivity curve
and what leads to shifts in a productivity curve?
6. What is economic freedom and why is it important for economic growth?

7. Why is economic growth so slow or non-existent in many third world countries? What
policies would you propose to improve the situation?

8. What policies can a government undertake to achieve faster economic growth?

9. A country's leadership believes that the neoclassical growth theory is correct. The country
already has the necessary preconditions for growth, so suggest policy changes the
government might enact to help speed economic growth.

10. Why are the governments of developed countries concerned about the quality of education in
their countries? What effect does education play in determining the country's economic
growth rate and its standard of living? Why does it have this effect?