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Question 01

Assuming a closed economy, the figure to the left displays the critical equations of the Solow growth model for an economy with zero labour force growth and no technological progress. The vertical distance BA represents:

a) saving per labourer in the steady state.

b) net investment per labourer in the steady state.

c) consumption per labourer in the steady state.

d) the marginal product of capital in the steady state.

Question 02

Assuming a closed economy, the figure to the left displays the critical equations of the Solow growth model for an economy with zero labour force growth and no technological progress. The saving rate increases from s to s´. Which of the following statements is false?

a) Depending on how high the saving rate was to begin with, it is possible for the new steady state consumption to be higher or lower than in the initial steady state.

b) The marginal product of capital is lower in the new steady state.

c) Employment is higher at the new steady state.

d) Net investment equals zero at both steady states.

Question 03

Assuming a closed economy, the figure to the left displays the critical equations of the Solow growth model for an economy with zero labour force growth and no technological progress. The We know this economy satisfies the golden-rule condition because:

a) consumption equals investment.

b) net investment is maximized.

c) gross investment is maximized.

d) the marginal product of capital is equal to the slope of the depreciation line.

Question 04

Assume a closed economy. The above figure displays the critical equations of the Solow growth model for an economy with positive labour force growth and no technological progress. Suppose the labour force growth rate increases from n₁ to n₂.

a) At the initial steady state there will be insufficient saving to maintain the capital-labour ratio.

b) After the capital widening condition has rotated in a counter-clockwise direction because of the increase in the labour force growth rate, it will gradually rotate back to the steady state as the capital-labour ratio adjusts.

c) Net investment will increase in order to keep up with the faster growth in the labour force.

d) The saving rate will drop in the movement of the economy from A₁ to A₂.

Question 05

In the steady state for this Solow model of economic growth with depreciation (ð), positive labour force growth (n) and technological change (a) seen in the above figure which of the following is not true?

a) Output per labourer is increasing.

b) Capital per labourer is increasing.

c) The wage rate is constant.

d) The profit rate is constant.

Question 06

The figure above bears a resemblance to the Solow model of economic growth with depreciation (ð), positive labour force growth (n) and technological change (a). However the fact that the production function does not display a diminishing marginal product for capital means that:

a) technological change is not exogenous any more.

b) an increase in the saving rate will have an impact on the long-run rate of growth of the economy.

c) long-run technological unemployment becomes a possibility.

d) at the new steady state k₂, saving will always be higher than capital accumulation.

Question 07

The Solow model implies that, all other things being equal, countries with rapidly growing population will tend to:

a) be poorer than countries with lower population growth.

b) grow slower than countries with lower population growth.

c) have lower marginal products of capital than countries with lower population growth.

d) all of the above

Question 08

In the steady state for the Solow model of economic growth with depreciation (ð), positive labour force growth (n) and technological change (a), we would expect Y/L to grow:

a) at rate (a + n + ð)

b) at rate (a + n - ð)

c) at rate (a + n)

d) at rate a

Question 09

The Solow residual measures:

a) the average growth rate of productive inputs less an adjustment for technological progress.

b) the part of the growth of output not attributable to the growth of inputs.

c) the share of net product that constitutes real capital income.

d) the dynamic efficiency of an economy.

Question 10

Assume an economy with constant, positive labour force growth but no technological progress within a Solow model of economic growth. This economy is dynamically inefficient, when:

a) there is unemployed labour in the economy.

b) the proportion of the growing labour force that is unemployed is increasing.

c) by decreasing the saving rate in the current period, it would be possible to increase future steady state.

d) the marginal product of capital does not equal the sum of the rate of growth of the labour force and the depreciation rate.

Oxford University Press, Online Resource Centre, Chapter 03.

Chapter 03

Instructions