Free Master of Economics: Economic Growth Questions and Answers — Questions and Answers
Question 1: Imagine that despite rising living standards, GDP remained stable over time. Which of the following is not likely to be the cause of this?
- There might be an increase in exports. (Correct answer)
- There might be an increase in leisure
- There might be an increase in household production.
- There might be an increase in production by the underground economy.
Correct answer: There might be an increase in exports.
If GDP remained stable while living standards rose, it implies that GDP, as a measure, is not fully capturing factors contributing to well-being. An increase in exports would directly *increase* GDP, making it an unlikely cause for stable GDP when living standards are rising. Conversely, increases in leisure, household production, or the underground economy contribute to living standards but are often not fully accounted for in official GDP figures, thus explaining a divergence where living standards improve without a corresponding rise in measured GDP.
Question 2: Where is equilibrium in the basic neoclassical growth model?
- Where capital per worker equals output per worker.
- Where investment per worker equals saving per worker.
- Where investment per worker equals depreciation per worker. (Correct answer)
- Where investment per worker equals capital per worker.
Correct answer: Where investment per worker equals depreciation per worker.
In the basic neoclassical growth model (Solow model), equilibrium, or the steady state, is reached when the capital stock per worker remains constant. This occurs precisely when the amount of new investment per worker is equal to the amount of capital per worker that depreciates over time (and also accounts for population growth, if applicable). At this point, net investment is zero, and the economy's capital-labor ratio, and thus output per worker, stabilizes.
Question 3: Which of the following claims is untrue in light of the neoclassical growth model?
- If people save and invest a higher proportion of their incomes, while everything else stays the same, living standards could fall.
- A new technology which makes workers more productive, while everything else stays the same, may not lead to sustained growth
- If the population continually grows, while everything else stays the same, then living standards will be lower than they would be if the population was constant.
- If people save and invest a higher proportion of their incomes, while everything else stays the same, then there will be sustained growth. (Correct answer)
Correct answer: If people save and invest a higher proportion of their incomes, while everything else stays the same, then there will be sustained growth.
The claim that a higher saving and investment proportion leads to sustained growth in the neoclassical growth model is untrue. In this model, an increase in the saving rate causes a temporary increase in the growth rate as the economy transitions to a new, higher steady-state level of capital per worker and output per worker. However, due to diminishing returns to capital, the growth rate eventually returns to the exogenous rate of technological progress (and population growth), meaning it does not lead to sustained, perpetual growth solely through higher saving.
Question 4: The population of the planet has more than doubled in the last 50 years. Which of the subsequent has also happened? <br> <br> 1. Most people have been left on subsistence incomes, as predicted by Malthus. <br> 2. The prices of most natural resources have risen greatly in relation to average wages.
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2 (Correct answer)
Correct answer: Neither 1 nor 2
Neither statement is accurate. Malthus's predictions of widespread subsistence incomes due to population growth have largely been disproven by technological advancements and productivity gains that have outpaced population growth in many regions. Furthermore, while natural resource prices fluctuate, they have not generally risen greatly in relation to average wages over the last 50 years; technological innovation, resource substitution, and increased efficiency have often mitigated scarcity, allowing real wages to increase significantly.
Question 5: Many factors can prevent a poor country from overtaking a wealthy one. Which of the following reasons is not one of them?
- The rich country may have more human capital.
- The poor country may have a higher saving ratio. (Correct answer)
- The rich country may be more open to the world economy.
- The poor country may have more rapid population growth.
Correct answer: The poor country may have a higher saving ratio.
A poor country having a higher saving ratio would not prevent it from overtaking a wealthy one; in fact, it would typically *help* it converge. According to growth theories like the Solow model, a higher saving rate leads to a higher steady-state level of capital and output per worker. Therefore, a poor country with a higher saving ratio would accumulate capital faster, potentially accelerating its catch-up process. Factors like less human capital, less openness, or rapid population growth are more likely to hinder convergence.
Question 6: Which of the ensuing assertions is accurate? <br> <br> 1. If output per head is proportional to the number of ideas had in the past, then a constant rate of growth requires ever rising numbers of new ideas each year. <br> 2. World population growth is a potential source of new ideas
- 1 only (Correct answer)
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Correct answer: 1 only
Statement 1 is accurate: If output per head is proportional to the *cumulative stock* of ideas, then to maintain a constant *rate* of growth, the *absolute number* of new ideas generated each year must continuously increase. This is because the base of existing ideas grows, requiring larger absolute increments to achieve the same percentage growth. Statement 2 is less certain; while more people mean more potential innovators, population growth also presents challenges and doesn't guarantee a higher rate of innovation per capita or per unit of time.
Question 7: Which of the y=Ak growth model claims below is untrue?
- They are called endogenous growth theories.
- They argue that increasing the saving ratio will have only a temporary effect on output per worker. (Correct answer)
- They assume the production function shifts upwards whenever the stock of physical capital increases.
- They suggest that if the level of investment is higher than depreciation, then there could be sustained growth.
Correct answer: They argue that increasing the saving ratio will have only a temporary effect on output per worker.
The claim that y=Ak growth models argue increasing the saving ratio will have only a temporary effect on output per worker is untrue. Unlike the neoclassical model with diminishing returns to capital, endogenous growth models (like the y=Ak model) assume constant or increasing returns to a broad measure of capital (including human capital or knowledge). In these models, an increase in the saving rate can lead to a permanently higher growth rate of output per worker, as there is no inherent force to halt growth.
Free Master of Economics: Economic Growth Questions and Answers
Imagine that despite rising living standards, GDP remained stable over time.
Which of the following is not likely to be the cause of this?