GDP And Economic Growth 3 — Questions and Answers
Question 1: The Solow Growth Model attributes long-run per capita GDP growth primarily to which factor?
- High savings rates
- Population growth
- Technological progress (Correct answer)
- Government investment
Correct answer: Technological progress
In the Solow model, only technological progress (total factor productivity growth) sustains long-run per capita income growth.
Question 2: Which phenomenon occurs when poorer countries grow faster than richer ones, closing the income gap?
- Stagflation
- Convergence hypothesis (Correct answer)
- Diminishing marginal returns
- Creative destruction
Correct answer: Convergence hypothesis
The convergence hypothesis predicts that poorer economies will grow faster and eventually catch up to wealthier ones.
Question 3: An economy operating below its potential GDP is experiencing what?
- A positive output gap
- Hyperinflation
- A negative output gap (recessionary gap) (Correct answer)
- Structural unemployment
Correct answer: A negative output gap (recessionary gap)
When actual GDP is below potential GDP, there is a negative output gap, indicating underutilized resources.
Question 4: Which policy is considered a SUPPLY-SIDE approach to boosting long-run economic growth?
- Increasing government spending on welfare programs
- Cutting income tax rates to increase investment incentives (Correct answer)
- Expanding the money supply to lower interest rates
- Raising the minimum wage significantly
Correct answer: Cutting income tax rates to increase investment incentives
Supply-side policies like tax rate cuts aim to increase incentives to work, save, and invest, expanding productive capacity.
Question 5: How does human capital investment contribute to GDP growth?
- It reduces government spending on social programs
- It lowers the trade deficit directly
- It raises worker productivity and output per person (Correct answer)
- It automatically increases the money supply
Correct answer: It raises worker productivity and output per person
Investment in human capital — education, training, and health — increases worker productivity, which drives higher output and GDP growth.
Question 6: What is 'creative destruction' in the context of economic growth?
- Government demolishing old infrastructure to build new roads
- The process by which innovation eliminates old industries while creating new ones (Correct answer)
- Destruction of capital goods during a recession
- Consumers destroying brand loyalty by switching products
Correct answer: The process by which innovation eliminates old industries while creating new ones
Creative destruction, a term from economist Joseph Schumpeter, describes how innovation displaces outdated industries, driving long-run growth.
Question 7: Which of the following would SLOW long-run economic growth?
- Increased investment in research and development
- Higher rates of savings and investment
- Declining educational attainment across the population (Correct answer)
- Improved property rights enforcement
Correct answer: Declining educational attainment across the population
Declining educational attainment reduces human capital accumulation, lowering productivity and long-run growth potential.
GDP And Economic Growth 3
The Solow Growth Model attributes long-run per capita GDP growth primarily to which factor?