Chapter 4 : Theories of Economic Growth
MULTIPLE CHOICE
1. The father of modern growth theory is:
a.
David Ricardo.
c.
Robert Solow.
b.
Thomas Malthus.
d.
Jeffrey Sachs.
2. Growth depends on which two processes?
a.
accumulation of assets and making those assets more productive
b.
harnessing natural resources and marketing them to developed nations at a “fair trade” rate
c.
exploitation of the agricultural sector in order to advance industrialization
d.
engaging in free trade while subsidizing domestic agricultural and industrial production
3. Every model of economic growth embodies:
a.
risk theory.
b.
aggregate production functions.
c.
an isoquant map.
d.
the basic theories of growth espoused by Adam Smith.
4. The capital-output ratio provides an indication of the:
a.
limits of growth.
b.
capital intensity of the production process.
c.
a country’s production function.
d.
the health and educational level of the population.
5. Because of population growth, Ghana’s GNP must grow by 1.5 percent per year just to avoid a decline
in average standards of living. With an ICOR of 6.0, achieving this minimum-growth target requires a
saving rate of:
a.
18 percent.
c.
50 percent.
b.
3 percent.
d.
9 percent.
6. Suppose the saving rate for a low-income country is given. If production becomes less capital
intensive, the ICOR will ________ and the growth rate will _________.
a.
increase; increase
c.
decrease; decrease
b.
decrease; increase
d.
increase; decrease
7. Consider the Harrod-Domar relationship for an economy:
g = (s/v) – d
Assume that the depreciation rate is 0. If the saving rate is 24 percent, the ICOR is 3, and the
depreciation rate is 5 percent, the economy can be expected to grow:
a.
8 percent.
c.
3 percent.
b.
19 percent.
d.
2 percent.
8. Consider the Harrod-Domar relationship for an economy:
g = (s/v) – d
Assume that the depreciation rate is 0. A country can only save 15 percent but wants to grow 15
percent. Assuming the ICOR is 3, the gap of ________ should be provided by foreign aid.
a.
10 percent
c.
5 percent
b.
0 percent
d.
We cannot say without more information.
9. If the investment rate in Indonesia is 29 percent of GDP, which of the following combinations is
consistent with the Harrod-Domar growth model?
a.
ICOR = 15.4; GDP growth rate = 7.6 percent per annum
b.
ICOR = 2.86; GDP growth rate = 5.1 percent per annum
c.
ICOR = 50.6; GDP growth rate = 2.2 percent per annum
d.
ICOR = 1 percent; GDP growth rate = 22 percent per annum
10. According to the Harrod-Domar model, what effect does an increase in the saving rate have on
long-term growth?
a.
leads to an increase
b.
leads to a decrease
c.
the advent of hyperinflation
d.
difficult to determine because of the unknown level of corruption in government
11. One of the problems of the Harrod-Domar framework is that its fixed-proportion production function
does not allow for any:
a.
population growth.
c.
endogenous technical change.
b.
substitution between labor and capital.
d.
depreciation.
12. From 1999–2007, Thailand’s economy experienced an annual growth rate of:
a.
2.1 percent.
c.
4.7 percent.
b.
3.9 percent.
d.
7.5 percent.
13. Unlike isoquants for a fixed-coefficient production function, the isoquants for a neoclassical
production function:
a.
take labor as well as capital into account.
b.
are L-shaped.
c.
are capital-intensive rather than labor-intensive.
d.
are curved.
14. According to the Solow model, the relationship between saving and growth is not linear because of:
a.
coordination failures between the banking sector and industry.
b.
business cycles that naturally occur in all economies.
c.
diminishing returns to capital in the production function.
d.
fluctuations in macroeconomic policy.
15. When an economy increases the amount of capital per worker, it is called:
a.
capital widening.
c.
labor widening.
b.
capital deepening.
d.
labor deepening.
16. In the Solow model, an increase in the population growth rate leads to:
a.
capital deepening.
b.
dynamic economic growth and development.
c.
the fulfillment of the Malthusian hypothesis.
d.
lower average income per worker.
17. The most unsettling conclusion of the Solow model is the conclusion that once the economy reaches
its long-run potential level of income, economic growth simply:
a.
declines, leading to what is referred to as a “failed state.”
b.
matches population growth, with no chance for sustained increases in average income.
c.
causes a rapid inflation, leading to an erosion of gains made during the growth period.
d.
subsides, as socialism becomes an acceptable form of political economy for the people.
18. While there is no evidence of absolute convergence, there is strong evidence today of conditional
convergence in which:
a.
countries sharing certain characteristics are able to achieve rapid growth and begin to
catch up with the richer countries.
b.
by entering into the World Trade Organization, a nation implicitly and explicitly agrees to
integrate into the global economy.
c.
countries all agree to play by “the rules of the game.”
d.
countries considered at the most advanced stage of capitalism begin to decline, while
developing nations accelerate past them.
19. Which of the following statements is true about new growth theories and the Solow and Harrod-Domar
models?
a.
Both underline the importance of factor accumulation and productivity in the growth
process.
b.
Both treat technology as endogenous.
c.
Both take externalities into account.
d.
Both assume increasing returns to scale.
SHORT ANSWER
IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in
pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two
terms and (2) the relationship between them.
1. Level of output, rate of change
ANS:
Answer will vary
2. Savings, investment
ANS:
Answer will vary
3. Incremental capital-output ratio (ICOR), neoclassical production function
ANS:
Answer will vary
4. Harrod-Domar equation, L-shaped isoquants
ANS:
Answer will vary
5. Solow model, isoquants
ANS:
Answer will vary
6. Labor force growth, depreciation
ANS:
Answer will vary
7. Endogenous technology, exogenous technology
ANS:
Answer will vary
8. Level effect, growth effect
ANS:
Answer will vary
9. Capital deepening, capital widening
ANS:
Answer will vary
10. Human capital, effective units of labor
ANS:
Answer will vary
11. Diminishing marginal product of capital, returns to scale
ANS:
Answer will vary
12. Unconditional convergence, conditional convergence
ANS:
Answer will vary