Free Master of Economics: Economic Growth 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?

Accepted Answer

There might be an increase in exports.

Answer

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?

Accepted Answer

Where investment per worker equals depreciation per worker.

Answer

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?

Accepted Answer

If people save and invest a higher proportion of their incomes, while everything else stays the same, then there will be sustained growth.

Answer

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?

1. Most people have been left on subsistence incomes, as predicted by Malthus.
2. The prices of most natural resources have risen greatly in relation to average wages.

Accepted Answer

Neither 1 nor 2

Answer

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?

Accepted Answer

The poor country may have a higher saving ratio.

Answer

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.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

Free Master of Economics: Economic Growth Questions and Answers