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Name TestBanks Chapter 8 Economic Growth I: Capital Accumulation and Population Growth
Description
Instructions

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Multiple Choice 1 points

Question
The Solow growth model describes:
Answer how output is determined at a point in time.
how output is determined with fixed amounts of capital and labor.
how saving, population growth, and technological change affect output over time.
the static allocation, production, and distribution of the economy's output.

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Multiple Choice 1 points

Question
Unlike the long-run classical model in Chapter 3, the Solow growth model:
Answer assumes that the factors of production and technology are the sources of the economy's output.
describes changes in the economy over time.
is static.
assumes that the supply of goods determines how much output is produced.

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Multiple Choice 1 points

Question
In the Solow growth model, the assumption of constant returns to scale means that:
Answer all economies have the same amount of capital per worker.
the steady-state level of output is constant regardless of the number of workers.
the saving rate equals the constant rate of depreciation.
the number of workers in an economy does not affect the relationship between output per worker and capital
per worker.

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Question
The production function y = f(k) means:
Answer labor is not a factor of production.
output per worker is a function of labor productivity.
output per worker is a function of capital per worker.
the production function exhibits increasing returns to scale.

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Multiple Choice 1 points

Question
When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the:
Answer graph is a straight line.
slope of the line eventually gets flatter and flatter.
slope of the line eventually becomes negative.
slope of the line eventually becomes steeper and steeper.

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Multiple Choice 1 points

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Question
When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the line denotes:
Answer output per worker.
output per unit of capital.
the marginal product of labor.
the marginal product of capital.

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Multiple Choice 1 points

Question
Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The
production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker
increases output per worker:
Answer more in Highland.
more in Lowland.
by the same amount in Highland and Lowland.
in Highland, but not in Lowland.

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Multiple Choice 1 points

Question
The consumption function in the Solow model assumes that society saves a:
Answer constant proportion of income.
smaller proportion of income as it becomes richer.
larger proportion of income as it becomes richer.
larger proportion of income when the interest rate is higher.

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Multiple Choice 1 points

Question
In the Solow growth model of Chapter 8, the demand for goods equals investment:
Answer minus depreciation.
plus saving.
plus consumption.
plus depreciation.

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Multiple Choice 1 points

Question
In the Solow growth model of Chapter 8, where s is the saving rate, y is output per worker, and i is investment per worker,
consumption per worker (c) equals:
Answer sy
(1 s)y
(1 + s)y
(1 s)y i

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Multiple Choice 1 points

Question
In the Solow growth model of Chapter 8, investment equals:
Answer output.
consumption.
the marginal product of capital.
saving.

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Multiple Choice 1 points

Question
In the Solow growth model of Chapter 8, for any given capital stock, the ______ determines how much output the economy
produces and the ______ determines the allocation of output between consumption and investment.

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Answer saving rate; production function

depreciation rate; population growth rate
production function; saving rate
population growth rate; saving rate

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Multiple Choice 1 points

Question
In the Solow growth model the saving rate determines the allocation of output between:
Answer saving and investment.
output and capital.
consumption and output.
investment and consumption.

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Question
______ cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall.
Answer Inflation; deflation
Interest rates; the discount rate
Investment; depreciation
International trade; depressions

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Multiple Choice 1 points

Question
Investment per worker (i) as a function of the saving ratio (s) and output per worker (f(k)) may be expressed as:
Answer s + f(k).
s f(k).
sf(k).
s/f(k).

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Multiple Choice 1 points

Question
Exhibit: Output, Consumption, and Investment

In this graph, when the capitallabor ratio is OA, AB represents:

Answer investment per worker, and AC represents consumption per worker.
consumption per worker, and AC represents investment per worker.
investment per worker, and BC represents consumption per worker.
consumption per worker, and BC represents investment per worker.

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Multiple Choice 1 points

Question
If the capital stock equals 200 units in year 1 and the depreciation rate is 5 percent per year, then in year 2, assuming no
new or replacement investment, the capital stock would equal _____ units.

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Answer 210
200
195
190

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Multiple Choice 1 points

Question
In the Solow model, it is assumed that a(n) ______ fraction of capital wears out as the capitallabor ratio increases.
Answer smaller
larger
constant
increasing

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Multiple Choice 1 points

Question
The change in capital stock per worker (k) may be expressed as a function of s = the saving ratio, f(k) = output per
worker, k = capital per worker, and = the depreciation rate, by the equation:
Answer k = sf(k)/k.
k = sf(k) k.
k = sf(k) + k.
k = sf(k) k.
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Multiple Choice 1 points

Question
The steady-state level of capital occurs when the change in the capital stock (k) equals:
Answer 0.
the saving rate.
the depreciation rate.
the population growth rate.

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Question
In the steady state with no population growth or technological change, the capital stock does not change because
investment equals:
Answer output per worker.
the marginal product of capital.
depreciation.
consumption.

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Multiple Choice 1 points

Question
In the Solow growth model of Chapter 8, the economy ends up with a steady-state level of capital:
Answer only if it starts from a level of capital below the steady-state level.
only if it starts from a level of capital above the steady-state level.
only if it starts from a steady-state level of capital.
regardless of the starting level of capital.

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Multiple Choice 1 points

Question
In the Solow growth model, the steady-state occurs when:
Answer capital per worker is constant.
the saving rate equals the depreciation rate.
output per worker equals consumption per worker.

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consumption per worker is maximized.

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Multiple Choice 1 points

Question
Exhibit: CapitalLabor Ratio and the Steady State

In this graph, capitallabor ratio k is not the steady-state capitallabor ratio because:
2
Answer the saving rate is too high.
the investment ratio is too high.
gross investment is greater than depreciation.
depreciation is greater than gross investment.

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Multiple Choice 1 points

Question
Exhibit: Steady-State CapitalLabor Ratio

In this graph, the capitallabor ratio that represents the steady-state capitalratio is:
Answer k0.
k1.
k2.
k3.

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Multiple Choice 1 points

Question
Exhibit: The CapitalLabor Ratio

In this graph, starting from capitallabor ratio k , the capitallabor ratio will:
1

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Answer decrease.
remain constant.
increase.
first decrease and then remain constant.

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Multiple Choice 1 points

Question
In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output will ______ until
the steady state is attained.
Answer increase; increase
increase; decrease
decrease; decrease
decrease; increase

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Multiple Choice 1 points

Question
In the Solow growth model, if investment is less than depreciation, the capital stock will ______ and output will ______ until
the steady state is attained.
Answer increase; increase
increase; decrease
decrease; decrease
decrease; increase

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Multiple Choice 1 points

Question
An economy in the steady state with no population growth or technological change will have:
Answer investment exceeding depreciation.
no depreciation.
saving equal to consumption.
no change in the capital stock.

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Multiple Choice 1 points

Question
In the Solow growth model with no population growth and no technological progress, the higher the steady capital-
per-worker ratio, the higher the steady-state:
Answer growth rate of total output.
level of consumption per worker.
growth rate of output per worker.
level of output per worker.

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Multiple Choice 1 points

Question
The formula for the steady-state ratio of capital to labor (k*), with no population growth or technological change, is s:
Answer divided by the depreciation rate.
multiplied by the depreciation rate.
divided by the product of f(k*) and the depreciation rate.
multiplied by f(k*) divided by the depreciation rate.

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Multiple Choice 1 points

Question
1/2
If the per-worker production function is given by y = k , the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the
steady-state ratio of capital to labor is:
Answer 1.
2.
4.

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9.

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Multiple Choice 1 points

Question
1/2
If the per-worker production function is given by y = k , the saving ratio is 0.3, and the depreciation rate is 0.1, then the
steady-state ratio of capital to labor is:
Answer 1.
2.
4.
9.

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Multiple Choice 1 points

Question
1/2
If the per-worker production function is given by y = k , the saving ratio is 0.2, and the depreciation rate is 0.1, then the
steady-state ratio of output per worker (y) is:
Answer 1.
2.
3.
4.

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Multiple Choice 1 points

Question
1/2
If the per-worker production function is given by y = k , the saving ratio is 0.3, and the depreciation rate is 0.1, then the
steady-state ratio of output per worker (y) is:
Answer 1.
2.
3.
4.

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Multiple Choice 1 points

Question
If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that
output will grow and that the new steady state will approach:
Answer a higher level of output per person than before.
the same level of output per person as before.
a lower level of output per person than before.
the Golden Rule level of output per person.

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Multiple Choice 1 points

Question
Among the four countriesthe United States, the United Kingdom, Germany, and Japanthe one that experienced the
most rapid growth rate of output per person between 1948 and 1972 was:
Answer the United States.
the United Kingdom.
Germany.
Japan.

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Multiple Choice 1 points

Question
If the national saving rate increases, the:
Answer economy will grow at a faster rate forever.
capitallabor ratio will increase forever.
economy will grow at a faster rate until a new, higher, steady-state capitallabor ratio is reached.
capitallabor ratio will eventually decline.

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Multiple Choice 1 points

Question
Starting from a steady-state situation, if the saving rate increases, the rate of growth of capital per worker will:
Answer increase and continue to increase unabated.
increase until the new steady state is reached.
decrease until the new steady state is reached.
decrease and continue to decrease unabated.

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Multiple Choice 1 points

Question
The Solow model shows that a key determinant of the steady-state ratio of capital to labor is the:
Answer level of output.
labor force.
saving rate.
capital elasticity in the production function.

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Multiple Choice 1 points

Question
A higher saving rate leads to a:
Answer higher rate of economic growth in both the short run and the long run.
higher rate of economic growth only in the long run.
higher rate of economic growth in the short run but a decline in the long run.
larger capital stock and a higher level of output in the long run.

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Multiple Choice 1 points

Question
Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth
model, in the steady state the country with the higher saving rate will have ______ level of output per person and ______
rate of growth of output per worker as/than the country with the lower saving rate.
Answer the same; the same
the same; a higher
a higher; the same
a higher; a higher

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Multiple Choice 1 points

Question
In the Solow growth model, with a given production function, depreciation rate, no technological change, and no population
growth, a higher saving rate produces a:
Answer higher MPK in the new steady state.
higher steady-state growth rate of output per worker.
higher steady-state growth rate of total output.
higher steady-state level of output per worker.

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Multiple Choice 1 points

Question
Examination of recent data for many countries shows that countries with high saving rates generally have high levels of
output per person because:
Answer high saving rates mean permanently higher growth rates of output.
high saving rates lead to high levels of capital per worker.
countries with high levels of output per worker can afford to save a lot.
countries with large amounts of natural resources have both high output levels and high saving rates.

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Multiple Choice 1 points

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Question
The Golden Rule level of capital accumulation is the steady state with the highest level of:
Answer output per worker.
capital per worker.
savings per worker.
consumption per worker.

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Multiple Choice 1 points

Question
The formula for steady-state consumption per worker (c*) as a function of output per worker and investment per worker is:
Answer c* = f(k*) k*.
c* = f(k*) + k*.
c* = f(k*) k*.
c* = k* f(k)*.

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Multiple Choice 1 points

Question
In the Solow growth model, increases in capital ______ output and ______ the amount of output used to replace
depreciating capital.
Answer increase; increase
increase; decrease
decrease; increase
decrease; decrease

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Multiple Choice 1 points

Question
Exhibit: Steady-State Consumption I

The Golden Rule level of the capitallabor ratio is:

Answer

above but below

above

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Question
Exhibit: Steady-State Consumption II

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Reference: Ref 8-1

(Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state consumption per worker is:
Answer AC.
AB.
BC.
DE.

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Question
Exhibit: Steady-State Consumption II

Reference: Ref 8-1

(Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state investment per worker is:
Answer AC.
AB.
BC.
DE.

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Multiple Choice 1 points

Question
In an economy with no population growth and no technological change, steady-state consumption is at its greatest possible
level when the marginal product of:
Answer labor equals the marginal product of capital.
labor equals the depreciation rate.
capital equals the depreciation rate.
capital equals zero.

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Question
The Golden Rule level of the steady-state capital stock:
Answer will be reached automatically if the saving rate remains constant over a long period of time.
will be reached automatically if each person saves enough to provide for his or her retirement.
implies a choice of a particular saving rate.

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should be avoided by an enlightened government.

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Multiple Choice 1 points

Question
If an economy is in a steady state with no population growth or technological change and the marginal product of capital is
less than the depreciation rate:
Answer the economy is following the Golden Rule.
steady-state consumption per worker would be higher in a steady state with a lower saving rate.
steady-state consumption per worker would be higher in a steady state with a higher saving rate.
the depreciation rate should be decreased to achieve the Golden Rule level of consumption per worker.

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Multiple Choice 1 points

Question
If an economy with no population growth or technological change has a steady-state MPK of 0.125, a depreciation rate of
0.1, and a saving rate of 0.225, then the steady-state capital stock:
Answer is greater than the Golden Rule level.
is less than the Golden Rule level.
equals the Golden Rule level.
could be either above or below the Golden Rule level.

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Multiple Choice 1 points

Question
If an economy with no population growth or technological change has a steady-state MPK of 0.1, a depreciation rate of 0.1,
and a saving rate of 0.2, then the steady-state capital stock:
Answer is greater than the Golden Rule level.
is less than the Golden Rule level.
equals the Golden Rule level.
could be either above or below the Golden Rule level.

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Multiple Choice 1 points

Question
1/2
With a per-worker production function y = k , the steady-state capital stock per worker (k*) as a function of the saving rate
(s) is given by:
Answer
k* = (s/)2.
k* = (/s)2.
k* = s/.
k* = /s.

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Multiple Choice 1 points

Question
To determine whether an economy is operating at its Golden Rule level of capital stock, a policymaker must determine the
steady-state saving rate that produces the:
Answer largest MPK.
smallest depreciation rate.
largest consumption per worker.
largest output per worker.

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Multiple Choice 1 points

Question
If an economy is in a steady state with no population growth or technological change and the capital stock is above the
Golden Rule level and the saving rate falls:
Answer output, consumption, investment, and depreciation will all decrease.
output and investment will decrease, and consumption and depreciation will increase.

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output and investment will decrease, and consumption and depreciation will increase and then decrease but
finally approach levels above their initial state.
output, investment, and depreciation will decrease, and consumption will increase and then decrease but
finally approach a level above its initial state.

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Multiple Choice 1 points

Question
Suppose an economy is initially in a steady state with capital per worker exceeding the Golden Rule level. If the saving rate
falls to a rate consistent with the Golden Rule, then in the transition to the new steady state, consumption per worker will:
Answer always exceed the initial level.
first fall below then rise above the initial level.
first rise above then fall below the initial level.
always be lower than the initial level.

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Multiple Choice 1 points

Question
A reduction in the saving rate starting from a steady state with more capital than the Golden Rule causes investment to
______ in the transition to the new steady state.
Answer increase
decrease
first increase, then decrease
first decrease, then increase

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Multiple Choice 1 points

Question
When an economy begins above the Golden Rule, reaching the Golden Rule:
Answer produces lower consumption at all times in the future.
produces higher consumption at all times in the future.
requires initially reducing consumption to increase consumption in the future.
requires initially increasing consumption to decrease consumption in the future.

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Multiple Choice 1 points

Question
If an economy is in a steady state with a saving rate below the Golden Rule level, efforts to increase the saving rate result
in:
Answer both higher per-capita output and higher per-capita depreciation, but the increase in per-capita output would be
greater.
both higher per-capita output and higher per-capita depreciation, but the increase in per-capita depreciation
would be greater.
higher per-capita output and lower per-capita depreciation.
lower per-capita output and higher per-capita depreciation.

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Multiple Choice 1 points

Question
If an economy is in a steady state with no population growth or technological change and the capital stock is below the
Golden Rule:
Answer a policymaker should definitely take all possible steps to increase the saving rate.
if the saving rate is increased, output and consumption per capita will both rise, both in the short and long runs.
if the saving rate is increased, output per capita will at first decline and then rise above its initial level, and
consumption per capita will rise both in the short and long runs.
if the saving rate is increased, output per capita will rise and consumption per capita will first decline and then
rise above its initial level.

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Multiple Choice 1 points

Question
Suppose an economy is initially in a steady state with capital per worker below the Golden Rule level. If the saving rate
increases to a rate consistent with the Golden Rule, then in the transition to the new steady state consumption per worker

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will:
Answer always exceed the initial level.
first fall below then rise above the initial level.
first rise above then fall below the initial level.
always be lower than the initial level.

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Multiple Choice 1 points

Question
When an economy begins below the Golden Rule, reaching the Golden Rule:
Answer produces lower consumption at all times in the future.
produces higher consumption at all times in the future.
requires initially reducing consumption to increase consumption in the future.
requires initially increasing consumption to decrease consumption in the future.

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Question
An increase in the saving rate starting from a steady state with less capital than the Golden Rule causes investment to
______ in the transition to the new steady state.
Answer increase
decrease
first increase, then decrease
first decrease, then increase

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Multiple Choice 1 points

Question
In an economy with population growth at rate n, the change in capital stock per worker is given by the equation:
Answer k = sf(k) + k.
k = sf(k) k.
k = sf(k) + ( + n)k.
k = sf(k) ( + n)k.
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Question
The formula for the steady-state ratio of capital to labor (k*) with population growth at rate n but no technological change,
where s is the saving rate, is s:
Answer divided by the sum of the depreciation rate plus n.
multiplied by the sum of the depreciation rate plus n.
divided by the product of f(k*) and the sum of the depreciation rate plus n.
multiplied by f(k*) divided by the sum of the depreciation rate plus n.

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Question
In the Solow growth model of an economy with population growth but no technological change, the break-even level of
investment must do all of the following except:
Answer offset the depreciation of existing capital.
provide capital for new workers.
equal the marginal productivity of capital (MPK).
keep the level of capital per worker constant.

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Question
In the Solow growth model of an economy with population growth but no technological change, if population grows at rate
n, then capital grows at rate ______ and output grows at rate ______.

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Answer n; n
n; 0
0; 0
0; n

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Question
In the Solow growth model of an economy with population growth but no technological change, if population grows at rate
n, total output grows at rate ______ and output per worker grows at rate ______.
Answer n; n
n; 0
0; 0
0; n

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Multiple Choice 1 points

Question
Assume two economies are identical in every way except that one has a higher population growth rate. According to the
Solow growth model, in the steady state the country with the higher population growth rate will have a ______ level of
output per person and ______ rate of growth of output per worker as/than the country with the lower population growth
rate.
Answer higher; the same
higher; a higher
lower; the same
lower; a lower

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Question
In the Solow growth model, an economy in the steady state with a population growth rate of n but no technological growth
will exhibit a growth rate of output per worker at rate:
Answer 0.
n.
.
(n + ).

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Question
In the Solow growth model, an economy in the steady state with a population growth rate of n but no technological growth
will exhibit a growth rate of total output at rate:
Answer 0.
n.
.
(n + ).

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Question
In the Solow growth model, if two countries are otherwise identical (with the same production function, same saving rate,
same depreciation rate, and same rate of population growth) except that Country Large has a population of 1 billion
workers and Country Small has a population of 10 million workers, then the steady-state level of output per worker will be
_____ and the steady-state growth rate of output per worker will be _____.
Answer the same in both countries; the same in both countries
higher in Country Large; higher in Country Large
higher in Country Small; higher in Country Small
higher in Country Large; higher in Country Small

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Question
In the Solow growth model with population growth, but no technological progress, the steady-state amount of investment
can be thought of as a break-even amount of investment because the quantity of investment just equals the amount of:
Answer output needed to achieve the maximum level of consumption per worker.
capital needed to replace depreciated capital and to equip new workers.
saving needed to achieve the maximum level of output per worker.
output needed to make the capital per worker ratio equal to the marginal product of capital.

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Multiple Choice 1 points

Question
In the Solow growth model, the steady state level of output per worker would be higher if the _____ increased or the _____
decreased.
Answer saving rate; depreciation rate
population growth rate; depreciation rate
depreciation rate; population growth rate
population growth rate; saving rate

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Multiple Choice 1 points

Question
In the Solow growth model with population growth, but no technological change, a higher level of steady-state output per
worker can be obtained by all of the following except:
Answer increasing the saving rate.
decreasing the depreciation rate.
increasing the population growth rate.
increasing the capital per worker ratio.

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Multiple Choice 1 points

Question
In the Solow growth model with population growth, but no technological change, which of the following will generate a
higher steady-state growth rate of total output?
Answer a higher saving rate
a lower depreciation rate
a higher population growth rate
a higher capital per worker ratio

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Multiple Choice 1 points

Question
The Solow growth model with population growth but no technological progress can explain:
Answer persistent growth in output per worker.
persistent growth in total output.
persistent growth in consumption per worker.
persistent growth in the saving rate.

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Multiple Choice 1 points

Question
In the Solow growth model, with a given production function, depreciation rate, saving rate, and no technological change,
higher rates of population growth produce:
Answer higher steady-state ratios of capital per worker.
higher steady-state growth rates of output per worker.
higher steady-state growth rates of total output.
higher steady-state levels of output per worker.

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Multiple Choice 1 points

Question
In the Solow growth model, with a given production function, depreciation rate, saving rate, and no technological change,
lower rates of population growth produce:

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Answer lower steady-state ratios of capital per worker.

lower steady-state growth rates of output per worker.
lower steady-state growth rates of total output.
lower steady-state levels of output per worker.

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Multiple Choice 1 points

Question
The Solow model with population growth but no technological change cannot explain persistent growth in standards of
living because:
Answer total output does not grow.
depreciation grows faster than output.
output, capital, and population all grow at the same rate in the steady state.
capital and population grow, but output does not keep up.

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Multiple Choice 1 points

Question
With population growth at rate n but no technological change, the Golden Rule steady state may be achieved by equating
the marginal product of capital (MPK):
Answer net of depreciation to n.
to n.
net of depreciation to the depreciation rate plus n.
to the depreciation rate.

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Multiple Choice 1 points

Question
In the Solow growth model with population growth, but no technological progress, in the Golden Rule steady state, the
marginal product of capital minus the rate of depreciation will equal:
Answer 0.
the population growth rate.
the saving rate.
output per worker.

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Question
In the Solow growth model with population growth, but no technological progress, if in the steady state the marginal product
of capital equals 0.10, the depreciation rate equals 0.05, and the rate of population growth equals 0.03, then the capital per
worker ratio ____ the Golden Rule level.
Answer is above
is below
is equal to
will move to

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Question
In the Solow growth model with population growth but no technological progress, increases in capital have a positive
impact on steady-state consumption per worker by _____, but have a negative impact on steady-state consumption per
worker by _____.
Answer increasing the capital to worker ratio; reducing saving in the steady state.
reducing investment required in the steady state; increasing saving in the steady state.
increasing output; increasing output required to replace depreciating capital.
decreasing the saving rate; increasing the depreciation rate.

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Question
An increase in the rate of population growth with no change in the saving rate:

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Answer increases the steady-state level of capital per worker.

decreases the steady-state level of capital per worker.
does not affect the steady-state level of capital per worker.
decreases the rate of output growth in the short run.

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Question
Analysis of population growth around the world concludes that countries with high population growth tend to:
Answer have high income per worker.
have a lower level of income per worker than other parts of the world.
have the same standard of living as other parts of the world.
tend to be the high-income-producing nations of the world.

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Question
According to Kremer, large populations:
Answer require the capital stock to be spread thinly, thereby reducing living standards.
place great strains on an economy's productive resources, resulting in perpetual poverty.
are a prerequisite for technological advances and higher living standards.
are not a factor in determining living standards.

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Question
According to Malthus, large populations:
Answer require the capital stock to be spread thinly, thereby reducing living standards.
place great strains on an economy's productive resources, resulting in perpetual poverty.
are a prerequisite for technological advances and higher living standards.
are not a factor in determining living standards.

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Question
According to the Solow growth model, high population growth rates:
Answer force the capital stock to be spread thinly, thereby reducing living standards.
place great strains on an economy's productive resources, resulting in perpetual poverty.
are a prerequisite for technological advances and higher living standards.
are not a factor in determining living standards.

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Question
The Malthusian model that predicts mankind will remain in poverty forever:
Answer underestimated the possibility for technological progress.
failed to predict that scarcity would be eliminated in the modern world.
assumed that prosperity would lead to declining human fertility.
recognized that the ability of natural resources to sustain humans is far greater than the power of population to
consume resources.

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Question
According to the Kremerian model, large populations improve living standards because:
Answer crowded conditions put more pressure on people to work hard.
there are more people who can make discoveries and contribute to innovation.
more people have the opportunity for leisure and recreation.
most people prefer to live with many other people.

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Question
0.3 0.7
If Y = K L , then the per-worker production function is:
Answer Y = F(K/L).
Y/L = (K/L)0.3.
Y/L = (K/L)0.5.
Y/L = (K/L)0.7.

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Question
1/2
If y = k , there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country
saves 20 percent of output each year, then the steady-state level of capital per worker is:
Answer 2.
4.
8.
16.

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Question
1/2
If y = k , the country saves 10 percent of its output each year, and the steady-state level of capital per worker is 4, then
the steady-state levels of output per worker and consumption per worker are:
Answer 2 and 1.6, respectively.
2 and 1.8, respectively.
4 and 3.2, respectively.
4 and 3.6, respectively.

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Question
1/2
Assume that two countries both have the per-worker production function y = k , neither has population growth or
technological progress, depreciation is 5 percent of capital in both countries, and country A saves 10 percent of output
whereas country B saves 20 percent. If A starts out with a capitallabor ratio of 4 and B starts out with a capitallabor ratio
of 2, in the long run:
Answer both A and B will have capitallabor ratios of 4.
both A and B will have capitallabor ratios of 16.
A's capitallabor ratio will be 4 whereas B's will be 16.
A's capitallabor ratio will be 16 whereas B's will be 4.

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Question
Assume that a war reduces a country's labor force but does not directly affect its capital stock. Then the immediate impact
will be that:
Answer total output will fall, but output per worker will rise.
total output will rise, but output per worker will fall.
both total output and output per worker will fall.
both total output and output per worker will rise.

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Question
Assume that a war reduces a country's labor force but does not directly affect its capital stock. If the economy was in a
steady state before the war and the saving rate does not change after the war, then, over time, capital per worker will
______ and output per worker will ______ as it returns to the steady state.
Answer decline; increase
increase; increase
decline; decrease
increase; decrease

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Question
If a larger share of national output is devoted to investment, then living standards will:
Answer always decline in the short run but rise in the long run.
always rise in both the short and long runs.
decline in the short run and may not rise in the long run.
rise in the short run but may not rise in the long run.

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Question
If a larger share of national output is devoted to investment, starting from an initial steady-state capital stock below the
Golden Rule level, then productivity growth will:
Answer increase in the short run but not in the long run.
increase in the long run but not in the short run.
increase in both the short run and the long run.
not increase in either the short run or the long run.

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Question
If the U.S. production function is CobbDouglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4
percent per year, and the Golden Rule steady-state capitaloutput ratio is 4.29, to reach the Golden Rule steady state, the
saving rate must be:
Answer 17.5 percent.
25 percent.
30 percent.
42.9 percent.

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Question
If all wage income is consumed, all capital income is saved, and all factors of production earn their marginal products, then:
Answer the economy will reach a steady-state level of capital stock below the Golden Rule level.
the economy will reach a steady-state level of capital stock above the Golden Rule level.
wherever the economy starts out, it will not grow.
wherever the economy starts out, it will reach a steady-state level of capital stock equal to the Golden Rule
level.

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Question
If an economy moves from a steady state with positive population growth to a zero population growth rate, then in the new
steady state, total output growth will be ______ and growth of output per person will be ______.
Answer lower; lower
lower; the same as it was before
higher; higher than it was before
higher; lower

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Question
If the production function exhibits decreasing returns to scale in the steady state, an increase in the rate of population
would lead to:
Answer growth in total output and growth in output per worker.
growth in total output but no growth in output per worker.
growth in total output but a decrease in output per worker.
no growth in total output or in output per worker.

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Multiple Choice 1 points

Question
If the production function exhibits increasing returns to scale in the steady state, an increase in the rate of growth of
population would lead to:
Answer growth in total output and growth in output per worker.
growth in total output but no growth in output per worker.
growth in total output but a decrease in output per worker.
no growth in total output or in output per worker.

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Essay 1 points

Question
1/2 1/2
Assume that a country's production function is Y = K L .
a. What is the per-worker production function y = f(k)?
b. Assume that the country possesses 40,000 units of capital and 10,000 units of labor. What is Y? What is
labor productivity computed from the per-worker production function? Is this value the same as labor
productivity computed from the original production function?
c. Assume that 10 percent of capital depreciates each year. What gross saving rate is necessary to make
the given capitallabor ratio the steady-state capitallabor ratio? (Hint: In a steady state with no
population growth or technological change, the saving rate multiplied by per-worker output must equal
the depreciation rate multiplied by the capitallabor ratio.)
d. If the saving rate equals the steady-state level, what is consumption per worker?

Answer a. y = k1/2.
b. Y = 20,000; Y/L = 2; y = 2; yes
c. s = 0.2.
d. Consumption per worker will be 1.6.

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Question
1/2
Assume that a country's per-worker production is y = k , where y is output per worker and k is capital per worker. Assume
also that 10 percent of capital depreciates per year (= 0.10).
a. If the saving rate (s) is 0.4, what are capital per worker, production per worker, and consumption per
1/2 1/2
worker in the steady state? (Hint: Use sy = k and y = k to get an equation in s, , k, and k , and
then solve for k.)
b. Solve for steady-state capital per worker, production per worker, and consumption per worker with s =
0.6.
c. Solve for steady-state capital per worker, production per worker, and consumption per worker with s =
0.8.
d. Is it possible to save too much? Why?

Answer a. k = 16; y = 4; consumption per worker is 2.4.

b. k = 36; y = 6; consumption per worker is 2.4.
c. k = 64; y = 8; consumption per worker is 1.6.
d. Yes. If the capital stock gets so big that the extra output produced by more capital is less than the extra
saving needed to maintain it, extra capital reduces consumption per worker. The saving rate exceeds
the Golden Rule rate.

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Question
Suppose that two countries are exactly alike in every respect except that the citizens of country A have a higher saving rate
than the citizens of country B.
a. Which country will have the higher level of output per worker in the steady state? Illustrate graphically.
b. Which country will have the faster rate of growth of output per worker in the steady state?

Answer a. Country A will have the higher level of output per worker.

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b. In the steady state the growth rate of output per worker will be zero in both country A and country B.

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Question
Suppose that two countries are exactly alike in every respect except that population grows at a faster rate in country A than
in country B.
a. Which country will have the higher level of output per worker in the steady state? Illustrate graphically.
b. Which country will have the faster rate of growth of output per worker in the steady state?

Answer a. Country B will have the higher level of output per worker.

b. In the steady state the growth rate of output per worker will be zero in both country A and country B.

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Question
It rains so much in the country of Tropicana that capital equipment rusts out (depreciates) at a much faster rate than it does
in the country of Sahara. If the countries are otherwise identical, in which country will the Golden Rule level of capital per
worker be higher? Illustrate graphically.
Answer The Golden Rule level of capital per worker will be higher in Sahara.

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Question
The economy of Alpha can be described by the Solow growth model. The following are some characteristics of the Alpha
economy:
saving rate (s) 0.20

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depreciation rate () 0.12

steady-state capital per worker (k) 4
population growth rate (n) 0.02
steady-state output per worker 20,000
a. What is the steady-state growth rate of output per worker in Alpha?
b. What is the steady-state growth rate of total output in Alpha?
c. What is the level of steady-state consumption per worker in Alpha?
d. What is the steady-state level of investment per worker in Alpha?

Answer a. In the steady state, capital per worker is constant, so output per worker is constant. Thus, the growth
rate of steady-state output per worker is 0.
b. In the steady state, population grows at 2 percent rate (0.02). Capital must grow at a rate of 2 percent in
order to maintain a constant capital per worker ratio in the steady state; therefore, given the constant
returns to scale production function, total output must increase at a 2 percent rate.
c. If the saving rate is 20 percent, then the consumption rate is 80 percent (1 0.2). Steady-state
consumption per worker is 16,000, which is 80 percent of steady-state output per worker.
d. In the steady state, investment per worker equals saving per worker, which is 20 percent of steady-state
output per worker. Thus, steady-state investment per worker is 4,000.

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Question
The initial steady-state level of capital per worker in Macroland is 5. The Golden Rule level of capital per worker in
Macroland is 8.
a. What must change in Macroland to achieve the Golden Rule steady state?
b. Why might the Golden Rule steady state be preferred to the initial steady state?
c. Why might some current workers in Macroland prefer the initial steady state to the Golden Rule steady
state?

Answer a. The saving rate in Macroland must be increased to achieve the higher capital per worker ratio of the
Golden Rule steady state.
b. Consumption per worker is higher in the Golden Rule steady state than in the initial steady state.
c. In the transition from the initial steady state to the Golden Rule steady state, the level of consumption
per worker must initially decrease to accumulate the additional capital required for the Golden Rule
steady state. Thus, workers who do not want to sacrifice current consumption for future consumption
may prefer the initial steady state.

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Question
The economies of two countries, North and South, have the same production functions, depreciation rates, and saving
rates. The economies of each country can be described by the Solow growth model. Population growth is faster in South
than in North.
a. In which country is the level of steady-state output per worker larger? Explain.
b. In which country is the steady-state growth rate of output per worker larger?
c. In which country is the growth rate of steady-state total output greater?

Answer a. North will have a higher level of steady-state output per worker because the population growth is faster
in South. The same saving in both countries means that investment in both countries will be the same.
However, capital will be spread more thinly per worker in the South, where the population is growing
more rapidly. Given the same production functions, output per worker will be higher in the North
because it has a higher capital per worker ratio than the South.
b. In the steady state in both countries, capital per worker is constant, so output per worker is constant.
The growth rate of output per worker is zero in both North and South.
c. In the steady state, total output grows at the rate of population growth. Since South has a higher rate of
population growth, the growth rate of total output will be higher in South than in North.

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Question
The economies of two countries, Thrifty and Profligate, have the same production functions and depreciation rates. There
is no population growth or technological progress in either country. The economies of each country can be described by the
Solow growth model. The saving rate in Thrifty is 0.3. The saving rate in Profligate is 0.05.
a. In which country is the level of steady-state output per worker larger? Explain.
b. In which country is the steady-state growth rate of output per worker larger?

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c. In which country is the growth rate of steady-state total output greater?

Answer a. Thrifty will have the higher level of steady-state output per worker. With a higher saving rate in Thrifty,
there will be more saving, more investment, and, consequently, a higher steady-state capital per worker
ratio. For the same production function, the higher capital per worker ratio will produce a higher level of
steady-state output per worker.
b. In the steady state in both countries, capital per worker is constant, so output per worker is constant.
The growth rate of output per worker is zero in both Thrifty and Profligate.
c. Since there is no population growth or technological change in the steady state, total output will be
constant in both countries. The growth rate of total output will be zero in both Thrifty and Profligate.

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Question
Many policymakers are concerned that Americans do not save enough. Using the Solow growth model, with no
technological change and no population growth, explain why:
a. for a given production function and depreciation rate, the saving rate determines the level of output per
worker.
b. a higher saving rate will not necessarily generate more consumption per worker.
c. a higher saving rate will not produce a faster steady-state growth rate of output per worker.

Answer a. The saving rate is the proportion of output that is saved and the proportion of output allocated to
investment. A larger amount of investment can maintain a larger ratio of capital per worker and,
therefore, a higher level of output per worker can be produced than with a smaller saving rate.
b. If a high rate of saving generates a level of capital per worker greater than the Golden Rule level of
capital per worker, then consumption per worker will be smaller than at the Golden Rule level, with a
lower saving rate.
c. In the steady state, the capital per worker ratio is constant, so output per worker is constant. The
steady-state growth rate of output per worker is zero regardless of the saving rate.

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Question
One of the key distinctions made in the analysis of the Solow growth model is between changes in levels and changes in
growth rates. How does an increase in the rate of population growth change the steady-state levels and growth rates of
output and output per worker in the Solow model with no technological change?
Answer The increase in the population growth rate will increase the steady-state level of output and the steady-state
growth rate of output (which will grow at a rate equal to the new higher growth rate of population). The increase in
the population growth rate will decrease the steady-state level of output per worker and will not change the
steady-state growth rate of output per worker which in the long run is zero.
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Question
Explain the two uses of saving in the steady state in the Solow model with population growth, but no technological
progress.
Answer Saving supplies: (1) the investment to replace the depreciating capital, and (2) investment to equip the new
workers with the same amount of capital as existing workers in the economy so that the steady-state capital
worker ratio does not change.
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Question
Compare and contrast the impact of a faster rate of population growth on the standard of living (output per worker) in the
models by Solow, Malthus, and Kremer.
Answer In the Solow growth model a faster rate of population growth reduces output per worker because capital must be
spread more thinly over the supply of workers. In Malthus's model faster population growth exhausts the supply of
food and leads to a lower standard of living. In Kremer's model faster rates of population growth increase the pool
from which new ideas and innovations can be drawn and thereby improves the standard of living.
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Question
Consider two countries that are otherwise identical (have the same saving rates and depreciation rates), but the population
of Country Large is 100 million, while the population of Country Small is 10 million. Use the Solow model with no
technological change to compare the steady-state levels of output per worker if:

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a. the population growth rates are the same in the two countries.
b. the population growth rate is higher in Country Large.

Answer a. The steady-state levels of output per worker will be the same in both countries because the assumption
of constant returns to scale means that the absolute size of the economy, measured by number of
workers, does not affect output.
b. The steady-state level of output per worker will be lower in Country Large, because with the same
saving rate but a faster growing population, Country Large will not be able to maintain as high a capital-
per-worker ratio as Country Small.

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Question
Larger quantities of steady-state capital have both a positive and negative effect on consumption per worker in the Solow
model (assume no population growth or technological progress). Explain.
Answer Larger quantities of steady-state capital increase the capital-per-worker ratio and increase the quantity of output,
and, therefore, a greater quantity of output is available for consumption per worker. Large quantities of
steady-state capital generate more depreciation, which must be replaced from output in order to maintain the
steady state, thus reducing the amount of output available for consumption per worker.
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