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Practice Questions For Chapter 10-12

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36 views3 pages

Practice Questions For Chapter 10-12

Uploaded by

asondlilemaphumulo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Practice Questions for Chapter 10-12

SECTION A: MCQ

1. Which of the following must occur to sustain economic growth in the long run?

A. A higher saving rate


B. Capital accumulation
C. Low inflation
D. Technological progress
E. All of the above

2. Ceteris Paribus, which of the following will cause a reduction in output per worker in the
long-run run?

A. Capital accumulation or technological progress


B. Capital accumulation
C. An increase in the number of workers
D. Expansionary monetary policy
E. None of the above

Use the following information regarding the Solow growth model to answer questions 3 and 4.
Assume that a closed economy operates with the following production function:

𝑌 = 𝐾 𝛼 𝑁𝛽
Where α = 0.25, β = 0.75 and the rate of depreciation is 3%.

3. What will the steady state of capital per worker be if the savings rate is 6% and the
population growth rate is zero?

A. 1.18
B. 1.68
C. 2
D. 2.5
E. 2.52

4. What is the steady state of capital per worker if depreciation is still 3%, the rate of
population growth is 2% and the savings rate is 5%?

A. 1
B. 1.28
C. 1.89
D. 2.44
E. It is impossible to calculate given the information
5. Suppose that two countries, A and B, are identical in every way except that country A has
a higher stock of human capital than country B. Given this information, the Solow model
predicts that, in the steady state,

A. the growth rate will be higher in A than in B


B. the growth rate will be the same in the two countries
C. output per worker will be the same in the two countries
D. K/N will be higher in B
E. none of the above

6. Consider a standard Solow model. If s∗ is the savings rate given by the Golden Rule, and
at the current savings rate s > s∗, which of the following is FALSE?

A. An increase in the current savings rate necessarily decreases consumption in the


steady state.
B. An increase in the current savings rate necessarily increases output per worker in
the steady state.
C. An increase in the current savings rate necessarily decreases capital per worker in
the steady state.
D. All the above
E. None of the above

7. Assume that an economy experiences both positive population growth and technological
progress. Once the economy has achieved steady state, we know that the capital per
effective worker ratio is

A. constant
B. growing at a rate of 𝑔𝐴 − 𝑔𝑁
C. growing at a rate of 𝑔𝑁
D. growing at a rate of 𝑔𝐴
E. growing at the same rate as Y/N.

SECTION B

Question 1
Assume a Solow growth model with no population growth and no technological progress. With
the aid of a single diagram, explain the effects of an increase in private saving rate on:

(i) The level of investment per worker


(ii) Long-run level of output per worker
(iii) Long-run growth of output per worker
Question 2
Discuss whether each of the following statements are true, false, or uncertain. Provide a clear
explanation of your answer.

(i) The golden-rule level of capital tells us that the highest level of consumption in the steady-
state is achieved when the saving rate is equal to 0.

(ii) Both the Solow model and endogenous model show that an economy that increases its
saving rate will experience faster growth.

(iii) If the aggregate technology exhibits constant returns, then the economy has necessarily a
constant growth rate at all times. Therefore, conditional convergence is unattainable.

(iv) A country that manages to increase its saving rate will experience a higher level of output
per worker and a higher growth rate of output per worker once it reaches the steady state.

Question 3
(i) Suppose the saving rate is greater than the golden rule saving rate (𝑠𝑔). First, explain what
must happen to the saving rate in order to increase steady state consumption. Second, what
are the advantages and disadvantages of this policy to increase steady state consumption?

(ii) Explain the effect of an increase in the rate of technological progress on permanent changes
in the rate of growth of output per worker?

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