CHAPTER 3

GROWTH AND ACCUMULATION

Difficulty: Easy
1. Growth accounting explains
A) how economic decisions control the accumulation of capital
B) how the current savings rate affects the stock of capital in the future
C) what part of growth in total output is due to growth in different factors of production
D) all of the above
E) only A) and B)
Ans: C

Difficulty: Easy
2. The relationship between the output produced in an economy, the input of factors of
production, and the state of technological knowledge is called the
A) the aggregate supply function
B) aggregate production function
C) aggregate investment function
D) marginal product of labor
E) marginal product of capital
Ans: B

Difficulty: Medium
3. Given the production function Y = AF(K,N) and assuming constant returns to scale, the
contribution of capital to output growth can be estimated by
A) adding the growth rate of capital to the term A
B) multiplying the growth rate of capital by capital's share in production
C) subtracting the growth rate of labor from the rate of technological advancement
D) multiplying the capital-labor ratio by the level of output
E) multiplying total factor productivity with capital’s share in production
Ans: B

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Difficulty: Easy
4. For the U.S. economy, we can assume that
A) output grows at the same rate as both capital and labor
B) capital is a larger source of growth than labor
C) labor is a larger source of growth than capital
D) capital and labor both contribute equally to output growth
E) both A) and D)
Ans: C

Difficulty: Easy
5. Which of the following is NOT a source of long-term output growth?
A) growth in consumption expenditures
B) growth in labor inputs
C) growth in capital inputs
D) improved technological efficiency
E) growth in the stock of knowledge
Ans: A

Difficulty: Medium
6. Which of the following is NOT a source of increased factor productivity?
A) advances in knowledge
B) growth in the size of the labor force
C) more efficient resource allocation
D) improved methods of production
E) technological progress
Ans: B

Difficulty: Easy
7. Which of the following economists contributed greatly to neoclassical growth theory in the
1950s and 1960s?
A) Robert Barro
B) Robert Lucas
C) Gregory Mankiw
D) Paul Romer
E) Robert Solow
Ans: E

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Difficulty: Easy
8. Changes in total factor productivity are also called
A) the marginal product of labor
B) the marginal product of capital
C) changes in input costs
D) the Cobb-Douglas residual
E) the Solow residual
Ans: E

Difficulty: Easy
9. Which of the following is NOT a source of increased factor productivity?
A) an increase in average years of schooling
B) an increase in on-the-job training
C) increased investment in health
D) an increase in the size of the capital stock
E) an increase in the rate of innovation
Ans: D

Difficulty: Easy
10. According to Solow's estimate, out of the average annual economic growth rate of 2.9% for
the U.S. from 1909 to 1949, how much was attributable to the accumulation of capital?
A) 0.12%
B) 0.32%
C) 0.75%
D) 1.22%
E) 1.55%
Ans: B

Difficulty: Easy
11. The Cobb-Douglas aggregate production function provides a fairly good approximation of
the U.S. economy if we assume that
A) the shares of capital and labor are equal
B) the share of capital is 0.65 and the share of labor is 0.35
C) the share of capital is 0.45 and the share of labor is 0.55
D) the share of capital is 0.25 and the share of labor is 0.75
E) the share of capital is 0.15 and the share of labor is 0.85
Ans: D

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Difficulty: Medium
12. If we assume a Cobb-Douglas production function, where the share of capital is 0.25 and the
share of labor is 0.75, then the marginal product of labor is equal to
A) Y/N
B) 3Y/4N
C) (3/4)N
D) 3K/4N
E) 3N/4Y
Ans: B

Difficulty: Medium
13. If we assume a Cobb-Douglas production function where the share of capital is equal to 0.2
and the share of labor is equal to 0.8, then the marginal product of capital is equal to
A) 5N/K
B) 5Y/K
C) Y/4K
D) Y/5K
E) Y/K
Ans: D

Difficulty: Medium
14. In the neoclassical growth model, an increase in the savings rate
A) raises the steady-state level of output
B) lowers the steady-state level of output
C) raises the long-term economic growth rate
D) lowers total factor productivity
E) both A) and C)
Ans: A

Difficulty: Easy
15. From 1973 to 1992, by how much more did GDP grow in Japan than in the United States?
A) 10%
B) 22%
C) 36%
D) 54%
E) 66%
Ans: C

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Difficulty: Easy
16. Which of the following countries had the lowest ratio of investment to GDP in 1992?
A) Japan
B) Norway
C) Singapore
D) Taiwan
E) United States
Ans: E

Difficulty: Difficult
17. Assume a Cobb-Douglas production function where the share of capital and labor is each 1/2.
If the growth in total factor productivity is zero and labor and capital each grow by 2%, then
A) output growth is 4% and the marginal product of capital is Y/K
B) output growth is 2% and the marginal product of capital is Y/(2K)
C) output growth is 2% and the marginal product of labor is (2Y)/N
D) output growth is 1% and the marginal product of labor is Y/(2N)
E) output growth is 1% and the marginal product of capital is (2Y)/K
Ans: B

Difficulty: Difficult
18. Assume a Cobb-Douglas production function where the share of capital is 0.3 and the share
of labor is 0.7. If capital grows by 1.5%, labor grows by 2%, and growth of total factor
productivity is 1.2%, by how much does total output grow?
A) 4.70%
B) 3.50%
C) 3.05%
D) 2.85%
E) 1.20%
Ans: C

Difficulty: Difficult
19. Assume a Cobb-Douglas production function where the share of labor is 0.7 and the share of
capital is 0.3. If there is no technological progress, capital grows at 1.5%, and labor doesn't
grow at all, what is the growth rate of output?
A) 0.45%
B) 0.60%
C) 1.05%
D) 1.50%
E) 2.00%
Ans: A

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Difficulty: Difficult
20. Assume a Cobb-Douglas production function where the share of labor is 0.7 and the share of
capital is 0.3. If there is no technological progress, labor grows at 2%, and capital grows at
1.5%, then real output will grow by
A) 0.45%
B) 1.50%
C) 1.85%
D) 2.85%
E) 3.05%
Ans: C

Difficulty: Medium
21. Assume that the rate of technological advance is 1.5% and both labor and capital grow at a
rate of 2%. What is the rate of output growth if labor's share of income is three times as high
as capital’s share and there are constant returns to scale?
A) 1.5%
B) 2.0%
C) 3.0%
D) 3.5%
E) 5.5%
Ans: D

Difficulty: Medium
22. Assume labor's share of income is 80% and capital's share of income is 20%. If we assume
constant returns to scale, there are no technological advances, and both labor and capital
grow at an annual rate of 3%, then the growth rate of output will be
A) 0.6%
B) between 0.6% and 2.4%
C) between 2.4% and 3%
D) 3%
E) greater than 3%
Ans: D

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Difficulty: Difficult
23. Assume a production function with constant returns to scale. The share of capital in
production is 1/4 and the share of labor is 3/4. If both labor and capital grow at 1.6% and the
rate of technological progress is 1.2%, what is the rate of growth of real output?
A) 1.2%
B) 1.6%
C) 2.8%
D) 3.2%
E) 4.8%
Ans: C

Difficulty: Difficult
24. Assume a production function with constant returns to scale. Labor's share of income is 4/5
and capital's share is 1/5. If labor grows at 3%, capital at 2%, and the rate of technological
advance is 1.2%, roughly how many years would it take to double the current level of output?
A) 12
B) 18
C) 23
D) 35
E) 48
Ans: B

Difficulty: Difficult
25. Assume a production function with constant returns to scale. Labor's share of income is 0.7
and capital's share is 0.3. If labor grows at 4% and capital grows at 3%, how many years
would it take to double the current level of output if no technological advances are made?
A) 7
B) 10
C) 19
D) 23
E) 33
Ans: C

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Difficulty: Difficult
26. Assume a Cobb-Douglas production function, where the share of labor (N) and capital (K) is
each 1/2 and A = 1. If the growth rate of labor is n = 0.06, the rate of depreciation is d = 0.04,
and the savings rate is s = 0.2, what is the value of the steady-state capital-labor ratio?
A) 0.5
B) 1
C) 2
D) 4
E) 5
Ans: D

Difficulty: Medium
27. In the neoclassical growth model, if a nation's savings rate decreases, we should expect that
A) the long-run income per capita will increase
B) the long-run capital-labor ratio will increase
C) the growth rate of output will temporarily decrease but eventually return to its long-run trend
D) all of the above
E) none of the above
Ans: C

Difficulty: Medium
28. In the neoclassical growth model, an increase in the rate of population growth will
A) raise the growth rate of output
B) increase the level of output per capita
C) increase the steady-state capital-labor ratio
D) all of the above
E) only B) and C)
Ans: A

Difficulty: Easy
29. If we compare the annual growth rates in the U.S. and Japan, we see that from 1950 to 1992,
the difference in average annual growth in GDP per capita between Japan and the U.S. was
about
A) 1.2%
B) 2.2%
C) 2.8%
D) 3.8%
E) 5.2%
Ans: D

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Difficulty: Easy
30. Which of the following is FALSE?
A) a high level of investment generally does not lead to a higher living standard
B) in industrial countries the amount of labor is less important than the skills and talent of the
work force
C) a country that possesses rich natural resources should have a high standard of living
D) countries with fewer average years of schooling often have lower living standards
E) if a poor country invests in health it can significantly increase the quality of human capital
and thus raise overall living standards
Ans: A

Difficulty: Medium
31. If two countries have the same aggregate production function, rate of technological growth,
and savings rate, then
A) they will always have the same per-capita income
B) the country with the higher rate of population growth will have a higher per-capita income
C) the country with the lower rate of population growth will have a higher per-capita income
D) the country with the highest depreciation rate will have the highest per-capita income
E) both C) and D)
Ans: C

Difficulty: Medium
32. In a neoclassical growth model, a decline in population growth will
A) shift the production function down
B) shift the savings function down
C) decrease the slope of the investment requirement line
D) all of the above
E) only A) and C)
Ans: C

Difficulty: Difficult
33. An economy with a capital-labor ratio that is lower than the steady-state level can achieve a
steady-state equilibrium at this lower capital-labor ratio only if
A) the savings rate decreases
B) the rate of depreciation decreases
C) the rate of population growth decreases
D) technological advances are made
E) all of the above
Ans: A

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Difficulty: Medium
34. In a neoclassical growth model, if the capital-labor ratio is lower than the (optimal) steady-
state level, we should expect that
A) saving is smaller than the investment requirement
B) output per capita will temporarily grow at a rate lower than population growth
C) income per capita will decrease
D) there will be a temporary increase in the capital stock that is greater than the increase in
population
E) all of the above
Ans: D

Difficulty: Medium
35. The convergence to a steady-state capital-labor ratio k* is ensured by the fact that if k is at a
level
A) lower than k*, saving will exceed the investment required to maintain a constant k, causing k
to rise
B) lower than k*, investment will exceed saving, leading to an increase in the capital stock
C) lower than k*, saving will exceed the investment required to maintain a constant k, causing
output per capita to decline
D) higher than k*, the rate of depreciation will be higher than the savings rate, causing k to
decrease
E) higher than k*, output per capita will continue to increase until a new steady-state
equilibrium is reached
Ans: A

Difficulty: Medium
36. In the neoclassical growth model, if the capital-labor ratio is below the (optimal) steady-state
level, we should expect that
A) economic growth will continue to decline unless technological advances are made
B) income per capita will decrease since gross investment is not sufficient to supply new
workers with adequate capital
C) the savings rate will decline due to the lack of economic growth
D) all of the above
E) none of the above
Ans: E

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Difficulty: Medium
37. In a neoclassical growth model, a nation with a declining population growth rate will
experience
A) a decrease in living standards
B) an increase in living standards
C) a lower savings rate
D) an increase in long-term growth
E) a decrease in the steady-state capital-labor ratio
Ans: B

Difficulty: Medium
38. A neoclassical growth model would predict that if the rates of both population growth and
saving increase, then the steady-state capital-labor ratio will
A) increase
B) decrease
C) stay the same
D) temporarily increase, but then go back to its original level
E) most likely change but we cannot say for sure how
Ans: E

Difficulty: Medium
39. Assume a neoclassical growth model with constant returns to scale. Which of the following
statements is TRUE?
A) a declining population growth rate will increase per-capita income
B) an increase in the savings rate will permanently increase the growth rate of output
C) an increase in the depreciation rate will increase the capital-labor ratio
D) technological advances will have no effect on the long-run growth rate of output
E) none of the above
Ans: A

Difficulty: Easy
40. The idea of a steady state is that
A) the capital-labor ratio grows at a constant rate
B) output per capita grows at a constant rate
C) output, capital, and labor all grow at the same rate
D) an increase in the savings rate will not affect the capital-labor ratio
E) real output cannot grow
Ans: C

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Difficulty: Easy
41. According to the neoclassical growth model, a one-time technological advance will
A) shift the investment requirement line up
B) increase the long-term growth rate of output
C) have no effect on the steady-state capital-labor ratio
D) lead to a decrease in the rate of depreciation
E) none of the above
Ans: E

Difficulty: Medium
42. The steady state is defined as a long-run equilibrium at which capital, labor, and output all
grow at the same rate. To be in a steady state in a neoclassical model, which of the following
equations has to be satisfied?
A) y = (n - d)k
B) sy = (n + d)k
C) sf(k) = (n - d)k
D) sy = nk + d
E) y = f(k) = sk + nd
Ans: B

Difficulty: Medium
43. In the neoclassical growth model, the steady-state capital-labor ratio is determined by the
equation
A) k = (n + d)y
B) k = s(n + d)
C) k = sy/(n + d)
D) k = y/(n - d)
E) k = (n + d)/sy
Ans: C

Difficulty: Medium
44. According to neoclassical growth theory which of the following does NOT affect a nation's
long-term growth rate?
A) the savings rate
B) technological progress
C) the rate of depreciation
D) population growth
E) both A) and C)
Ans: E

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Difficulty: Medium
45. For a neoclassical growth model, which of the following statements is FALSE?
A) an increase in the savings rate will increase the steady-state growth rate of aggregate output
B) an increase in population growth will increase the steady-state growth rate of aggregate
output
C) an increase in population growth will reduce the steady-state level of income per capita
D) if poor countries save at the same rate as rich countries and have access to the same
technology, they will eventually catch up
E) long-run growth results from improvements in technology
Ans: A

Difficulty: Medium
46. In a neoclassical growth model in which a one-time advance in technology occurs we could
expect
A) the level of saving and investment to increase until a new and higher steady-state capital-
labor ratio is reached
B) the level of income per capita to increase but the steady-state growth rate of output to remain
unaffected
C) the level of output for any given capital-labor ratio to increase
D) all of the above
E) none of the above
Ans: D

Difficulty: Easy
47. When current saving and investment are just enough to equip new entrants into the labor
force with the same amount of capital that the average person already in the work force uses,
then
A) the economy is in a steady state
B) output per head is constant
C) capital per head is constant
D) capital is growing at the same rate as the population
E) all of the above
Ans: E

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Difficulty: Medium
48. In a neoclassical growth model, steady-state consumption is maximized when the marginal
increase in the capital-labor ratio (k) produces just enough extra output per capita (y) that the
marginal product of k is equal to
A) n + d
B) sy/(n – d)
C) sy/(n + d)
D) sa - (n + d)
E) s - (n + d)
Ans: A

Difficulty: Medium
49. The golden-rule capital stock (k**) ensuring that steady-state consumption is maximized is at
the point on the production function f(k) where the marginal product of capital (k) is equal to
A) n + d
B) n - d
C) s(n + d)
D) sa/(n + d)
E) sa/(n - d)
Ans: A

Difficulty: Medium
50. The golden-rule capital stock (k**) corresponds to
A) the highest permanently sustainable level of steady-state consumption
B) the point at which a marginal increase in capital produces just enough extra output to cover
the increased investment requirement
C) the point on the production function y = f(k), where the slope of f(k) is equal to (n + d)
D) all of the above
E) none of the above
Ans: D

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