Chapter Which organization lends money to developing countries? A) EU. B) NAFTA. C) World Bank. D) WTO.

Transcription

1 Chapter 7 1. Which organization lends money to developing countries? A) EU. B) NAFTA. C) World Bank. D) WTO. 2. Malthus and other Classical growth economists A) correctly predicted the mass starvations observed in the 1800s. B) correctly predicted that economic growth would cease in the 1800s. C) failed to take into account the law of diminishing marginal productivity. D) failed to take into account technological development and capital accumulation. 3. Specialization allows individuals to A) broaden their skill base. B) become more self-sufficient. C) focus their attention on one aspect of production. D) better understand the entire production process. 4. The Rule of 72 implies that a country with a growth rate of 2 percent will A) never double its income. B) double its income in 7 years. C) double its income in 36 years. D) double its income in 50 years. 5. If there are increasing returns to scale, as A) inputs rise, output falls. B) inputs rise, output rises by a smaller percentage. C) inputs rise, output rises by a larger percentage. D) one input rises, output rises by a larger percentage. Page 1

2 6. The production function is best represented in the following form: A) Output = A. B) Output = f(labour, Capital, Land). C) Output = A f(labour, Capital, Land). D) Output = [A f(labour, Capital, Land)] b. 7. All of the following policies encourage per capita growth EXCEPT A) policies to encourage saving and investment. B) policies to improve incentives to work. C) policies to improve education. D) policies to shelter important domestic industries from international competition. 8. The Rule of 72 implies that a country will double its income in 9 years if its growth rate is A) 4 percent. B) 6 percent. C) 8 percent. D) 11.1 percent. 9. For a reduction in income tax rates to cause people to work more, the following must be true: A) The substitution effect must be greater than the income effect. B) The substitution effect must be less than the income effect. C) The supply of labour must be perfectly inelastic. D) The supply of labour must be perfectly elastic. 10. If per capita output increases by 5 percent and output grows by 3 percent, the population must be A) falling at a rate of 8 percent. B) falling at a rate of 2 percent. C) increasing at a rate of 2 percent. D) increasing at a rate of 8 percent. 11. The borrowing circle concept originated in A) Bulgaria. B) Singapore. C) Bangladesh. D) South Korea. Page 2

3 Use the following to answer question 12: 12. Refer to the graph above. In the graph, the law of diminishing marginal productivity is operating A) only below L1. B) only above L2. C) only between L1 and L2. D) at all employment levels. 13. The growth produced by markets A) makes everyone better off and improves the distribution of income as well. B) makes the rich better off at the expense of the poor. C) makes everyone better off, but may worsen the distribution of income. D) affects the level of income but not its distribution. Use the following to answer question 14: Output All Inputs Page 3

4 14. Refer to the graph above. The production function in the figure could be the result of A) learning by doing. B) the absence of positive externalities. C) diminishing marginal productivity. D) constant returns to scale. 15. Investment is A) the same thing as capital. B) the decrease in capital over time. C) the increase in capital over time. D) unrelated to capital. 16. Which of the following policies will slow an economy's growth rate? A) Increasing trade restrictions. B) Increasing the level of education. C) Increasing saving. D) Protecting property rights. 17. The iron law of wages is the belief that A) population increases until starvation ensues. B) population increases as long as output per worker is above the subsistence level. C) output growth must always be less than population growth. D) output growth slows as the population increases. 18. Supply side economists would be the economists most likely to recommend which of the following policies to increase economic growth: A) an income tax increase. B) an income tax reduction. C) policies to reduce imports. D) policies to increase trade. Page 4

5 Use the following to answer question 19: 19. Refer to the graph above. If increases in employment led to identical increases in output, which of the above production functions would we observe? A) A. B) B. C) C. D) D. 20. Which of the following statements about technology is true? A) Without technological innovation, an economy cannot grow. B) Many of the new technologies of the 1980s were thought up in Canada and the United States but translated into workable products in Japan. C) Many of the new technologies of the 1980s were thought up in Japan but translated into workable products in the United States. D) The economies of the European Union have grown faster than that of the United States because they have developed many new industries in the 1980s. 21. If output increases by 2 percent and population growth is 3 percent, per capita output A) falls by 5 percent. B) falls by 1 percent. C) grows by 1 percent. D) grows by 5 percent. 22. According to the Classical growth model, the production function was A) a straight upward sloping line. B) an upward sloping line whose slope was continuously decreasing. C) an upward sloping line whose slope was continuously increasing. D) a straight downward sloping line. Page 5

6 23. Which organization lends money to developing countries? A) EU. B) NAFTA. C) IMF. D) WTO. 24. In new growth theory, A) the law of increasing marginal productivity overwhelms the law of diminishing marginal productivity. B) learning by doing may overwhelms the law of diminishing marginal productivity. C) the law of technology overwhelms the law of diminishing marginal productivity. D) the law of QWERTY overwhelms the law of diminishing marginal productivity. 25. According to the law of diminishing marginal productivity, decreasing the quantity of an input used in the production of a good should lead to A) successively smaller decreases in output. B) the same decrease in output. C) successively larger decreases in output. D) no change in output until a certain point is reached. 26. Why does the corporation provide an incentive to innovate? A) Patents are awarded only to corporations. B) Corporations can avoid double taxation of their income. C) Corporations limit the risk to investors. D) Corporations are not affected by market forces. Use the following to answer question 27: Output All Inputs Page 6

7 27. Refer to the graph above. Production in the figure is characterized by A) decreasing returns to scale. B) increasing returns to scale. C) constant returns to scale. D) diminishing marginal productivity. 28. Per capita output grows when A) the population grows. B) output grows. C) output grows faster than the population grows. D) the population grows faster than output grows. 29. The Rule of 72 implies that a country will double its income in 4 years if its growth rate is A) 8 percent. B) 12 percent. C) 18 percent. D) 25 percent. 30. Suppose the quantity of labour used to produce tables is increased in one-hour increments from 20 hours to 30 hours and that each successive increment raises output by a smaller amount. Assuming all else is equal, this pattern is consistent with A) decreasing returns to scale. B) constant returns to scale. C) increasing returns to scale. D) the law of diminishing marginal productivity. 31. Jamaica has far less capital than Singapore. Based on this, the Classical growth model would predict that as each accumulates more capital A) Jamaica would grow more rapidly than Singapore. B) Jamaica would grow at the same rate as Singapore. C) Jamaica would grow at a slower rate than Singapore. D) Jamaica would grow at a rate that would eventually over take Singapore. Page 7

8 32. According to the Classical growth model, an economy that increases its saving will grow A) slower because consumption and aggregate demand will be reduced. B) slower because interest rates will fall, causing investment to decline. C) faster since the increase in saving will permit greater investment. D) faster since the increase in saving will permit more rapid technological progress. 33. Which of the following factors made the smallest contribution to growth between 1928 and 1998? A) Technology. B) Human capital. C) Physical capital. D) Labour. 34. Economic growth A) does not affect living standards. B) has a relatively small effect on living standards. C) has a relatively large effect on living standards. D) is the sole determinant of living standards. 35. The central argument of new growth theory is that the pace of technological change depends on A) the level of capital accumulation. B) the level of investment in technology. C) the level of investment in capital. D) complex factors that have not yet been identified. 36. Suppose Slovakia and Zimbabwe have the same populations but Slovakia has three times as much capital as Zimbabwe. Under these circumstances, the Classical growth model would predict that A) Slovakia would be richer than Zimbabwe and would grow faster. B) Slovakia would be richer than Zimbabwe and would grow slower. C) Zimbabwe would be poorer than Slovakia at first but would eventually become richer. D) Slovakia would always be richer than Zimbabwe. 37. Population control policies are important for all of the following reasons EXCEPT A) more rapid population growth exacerbates diminishing marginal productivity. B) more rapid population growth often increases the percentage of the population which is dependent. C) more rapid population growth makes it difficult to provide adequate education. D) more rapid population growth undermines private property rights. Page 8

9 38. All of the following policies encourage per capita growth EXCEPT A) policies that discourage work. B) policies that promote basic research. C) policies that reduce investor risk. D) policies that protect private property. 39. The Laffer curve implies A) a reduction in income tax rates always increases tax revenue. B) when labour supply is very inelastic, a reduction in income tax rates will likely increase tax revenue. C) when income tax rates are very high, a reduction will likely decrease tax revenue. D) when income tax rates are very high, a reduction will likely increase tax revenue. 40. If per capita output falls by 2 percent and population grows by 3 percent, output A) falls by 5 percent. B) falls by 1 percent. C) grows by 1 percent. D) grows by 5 percent. 41. Technological lock-in A) occurs when the presence of a less efficient technology blocks the adoption of a more efficient technology. B) occurs when network externalities are absent. C) increases the efficiency with which technology is used. D) is no longer possible because of the development of network externalities. 42. Saving and investment policies in developing countries A) should focus on raising the level of saving among the poor. B) should attempt to stem the flow of domestic saving abroad. C) should create financial institutions that allow individuals to save and invest. D) should do all of the above. 43. The law of diminishing marginal productivity A) always applies. B) applies only when learning by doing is not present. C) may apply even when learning by doing is present. D) no longer applies. Page 9

10 44. Output stops growing in the Classical growth model because A) the iron law of wages reduces population growth. B) the law of diminishing marginal productivity causes the surplus to be maximized. C) at some point increases in output are not sufficient to support increases in population. D) population growth never stops. 45. Productivity A) increases, the greater is the division of labour. B) decreases, the greater is the division of labour. C) is not affected by the division of labour. D) has an unclear relationship with the division of labour. 46. If per capita output increases by 2 percent and population grows by 3 percent, output A) falls by 5 percent. B) falls by 1 percent. C) grows by 1 percent. D) grows by 5 percent. 47. Population control policies are likely to A) have little effect on per capita growth in developed or developing countries. B) be most successful in promoting per capita growth in developing countries. C) be most successful in promoting per capita growth in developed countries. D) have the same effect on per capita growth in developed and developing countries. 48. In the Classical growth model A) richer countries will always grow faster than poorer countries. B) poorer countries will always grow faster than richer countries but will never become as rich. C) all countries will eventually have the same per capita incomes. D) countries will never share the same per capita incomes. 49. Markets help to promote growth by A) increasing specialization and the division of labour. B) reducing specialization and the division of labour. C) encouraging self-sufficiency. D) undermining a nation's comparative advantage. Page 10

11 50. All of the following are important sources of growth except A) private ownership of property. B) increased educational achievement. C) improvements in financial markets. D) diminishing marginal productivity. Page 11

12 Answer Key 1. C This organization extends credit to countries in need of financial assistance. 2. D Technological development and capital accumulation overwhelmed the law of diminishing marginal productivity. 3. C See the definition of specialization in the text. 4. C The Rule of 72 says that a country's income will double in the number of years equal to 72 divided by the country's growth rate (36 in this case.) 5. C As discussed in the text returns to scale refers to the relation between all inputs and outputs. 6. C See the equation for the production function in the text. 7. D By undermining competition and reducing specialization, these policies undermine per capita growth. 8. C The Rule of 72 says that a country's income will double in the number of years equal to 72 divided by the country's growth rate. Dividing 72 by 9 gives us a growth rate of 8 percent. 9. A The substitution effect must be greater than the income effect. Although labour supply cannot be perfectly inelastic, it does not have to be perfectly elastic. 10. B Growth in per capita output equals the difference between the growth rate of output and the growth rate of population. 11. C See the discussion of the borrowing circle concept in the text. 12. D The production function has a diminishing slope, implying that the increase in output produced by successive workers is decreasing. 13. C Markets benefit both the rich and the poor but do not necessarily do so equally. 14. A Page 12

13 Learning by doing produces increasing returns to scale when the positive externalities associated with it are large enough to overwhelm diminishing marginal productivity. 15. C As defined in the text investment is the increase in capital over time. 16. A Economists generally believe that trade increases growth, so increasing trade restrictions would decrease growth. 17. B See the definition of the iron law of wages in text. 18. B Generally economists of all types favour trade liberalization but supply side economists would be the most likely to recommend a reduction in income taxes to increase economic growth. 19. B Because the slope of B is positive and constant, we know that the increase in output produced by identical increases in employment is constant. 20. B Students might choose "Without technological innovation, growth is impossible," but would be incorrect. Japan imported technological innovations from Canada and the United States and turned them into workable products. 21. B Growth in per capita output equals the difference between the growth rate of output and the growth rate of population. 22. B The law of diminishing marginal productivity implied that successive increases in labour led to smaller and smaller increases in output. 23. C The IMF is the International Monetary Fund. This organization extends credit to countries in need of financial assistance. 24. B The only law mentioned in the book in the law of diminishing marginal productivity. The others are not laws and can't overwhelm anything. 25. C The law of diminishing marginal productivity implies that increasing the quantity of one input will lead to smaller and smaller increases in output. The opposite must be true when a single input is decreased. 26. C The limited liability of corporations limits the risks to investors. Page 13

14 27. B The increasing slope of the production function implies that doubling all inputs more than doubles output. 28. C Per capita output is output per person and can grow only when output grows faster than the number of persons. 29. C The Rule of 72 says that a country's income will double in the number of years equal to 72 divided by the country's growth rate. Dividing 72 by 4 gives us a growth rate of 18 percent. 30. D The law of diminishing marginal productivity applies here because only one input, labour, is being increased here. 31. A If Jamaica has less capital than Singapore, than the law of diminishing marginal productivity will apply much more to Singapore than Jamaica. This means that capital accumulation will cause Jamaica to grow more rapidly than Singapore. 32. C Greater saving permits higher level of investment and capital accumulation which in turn stimulate growth. 33. B At 13 percent, human capital contributed less to growth than any other factor. 34. C As the examples in the text illustrate, small differences in growth rates are ultimately translated into large differences in living standards. Of course living standards are not determined entirely by growth rates but also depend on other factors such as political freedom, respect for human rights, environmental quality, etc. 35. B Technological change in new growth theory is determined by factors such as the level of research and development and spending on pure science. These investments determine the rate at which technology changes 36. B Since Slovakia has more capital, it will be richer but it will also grow more slowly because it will be subject to the law of diminishing marginal productivity to a greater degree. 37. D Protection of private property rights does not require population control policies and is not likely to be affected by such policies. 38. A Policies that discourage work shift the production possibility curve in, not out. Page 14

15 39. D The substitution effect must be greater than the income effect. Although labour supply cannot be perfectly inelastic, it does not have to be perfectly elastic. 40. C Growth in per capita output equals the difference between the growth rate of output and the growth rate of population. 41. A See the definition of technological lock-in in the text. 42. D Low saving levels, capital flight, and the lack of adequate financial infrastructure all contribute to low levels of investment and growth in developing countries. 43. C Learning by doing produces positive externalities, but unless these externalities are large enough, diminishing marginal productivity will still exist. 44. C The combination of the iron law of wages and the law of diminishing marginal productivity produce this result. 45. A The greater is the division of labour, the greater is specialization, and hence the greater is productivity. 46. D Growth in per capita output equals the difference between the growth rate of output and the growth rate of population. 47. B Population growth rates are much higher in developing countries than in developed countries, so developing countries stand to gain the most in terms of per capita growth from population control policies. 48. C This is because per capita growth eventually ceases in the Classical growth model beyond some level of capital as a result of the law of diminishing marginal productivity. 49. A By increasing specialization and the division of labour, markets make it possible for a country to focus its production more heavily on its comparative advantage. This increases efficiency and productivity. 50. D Private ownership of property is a growth-compatible institution; education is human capital; financial markets are social capital. Diminishing marginal productivity limits growth. Page 15