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1. Consider three imaginary countries. In Aziria, saving amounts to $3,000 and consumption amounts to $7,000; in
Graniva, saving amounts to $2,000 and consumption amounts to $8,000; and in Tanistan, saving amounts to $4,500 and
consumption amounts to $10,500. The saving rate is
a.
higher in Aziria than in Tanistan, and it is higher in Tanistan than in Graniva.
b.
higher in Graniva than in Tanistan, and it is higher in Tanistan than in Aziria.
c.
higher in Tanistan than in Graniva, and it is the same in Graniva and Aziria.
d.
higher in Aziria than in Graniva, and it is the same in Aziria and Tanistan.
2. Consider three imaginary countries. In Aire, saving amounts to $4,000 and consumption amounts to $12,000; in
Bovina, saving amounts to $3,000 and consumption amounts to $24,000; and in Cartar, saving amounts to $10,000 and
consumption amounts to $50,000. The saving rate is
a.
higher in Aire than in Cartar, and it is higher in Cartar than in Bovina.
b.
higher in Cartar than in Aire, and it is higher in Aire than in Bovina.
c.
higher in Cartar than in Bovina, and it is the same in Bovina and Aire.
d.
higher in Aire than in Bovina, and it is the same in Aire and Cartar.
3. One of the Ten Principles of Economics in Chapter 1 is that people face tradeoffs. The growth that arises from capital
accumulation is not a free lunch. It requires that society
a.
conserve resources for future generations.
b.
sacrifice consumption goods and services now in order to enjoy more consumption in the future.
c.
recycle resources so that future generations can produce goods and services with the accumulated capital.
d.
None of the above is correct.
4. In an economy where net exports are zero, if saving rises in some period, then in that period
a.
consumption and investment fall.
b.
consumption falls and investment rises.
c.
consumption rises and investment falls.
d.
consumption rises and investment falls.
5. Other things the same, when an economy increases its saving rate
a.
consumption and production rise now.
b.
consumption rises now and production rises later
c.
consumption falls now and production rises later.
d.
consumption falls now and production falls later.
6. When a society decides to increase its quantity of physical capital, the society
a.
can avoid the usual need to face trade-offs.
b.
is apparently not very concerned about its rate of economic growth in the future.
c.
is in effect deciding to consume fewer goods and services in the present.
d.
is in effect deciding to save less of its current income in the present.
7. Accumulating capital
a.
requires that society sacrifice consumption goods in the present.
b.
allows society to consume more in the present.
c.
decreases saving rates.
d.
involves no tradeoffs.
8. “When workers already have a large quantity of capital to use in producing goods and services, giving them an
additional unit of capital increases their productivity only slightly.” This statement
a.
represents the traditional view of the production process.
b.
is an assertion that capital is subject to diminishing returns.
c.
is made under the assumption that the quantities of human capital, natural resources, and technology are being
held constant.
d.
All of the above are correct.
9. “When workers already have a large quantity of capital to use in producing goods and services, giving them an
additional unit of capital increases their productivity only slightly.” This statement
a.
represents an unconventional view of the production process.
b.
is an assertion that capital is subject to increasing returns.
c.
is made under the assumption that the quantities of human capital, natural resources, and technology are being
held constant.
d.
All of the above are correct.
10. “When workers have a relatively small quantity of capital to use in producing goods and services, giving them an
additional unit of capital increases their productivity by a relatively large amount.” This statement
a.
is an assertion that production functions have the property of constant returns to scale.
b.
is consistent with the view that capital is subject to diminishing returns.
c.
is inconsistent with the view that it is easier for a country to grow fast if it starts out relatively poor.
d.
All of the above are correct.
11. The traditional view of the production process is that capital is subject to
a.
constant returns.
b.
increasing returns.
c.
diminishing returns.
d.
diminishing returns for low levels of capital, and increasing returns for high levels of capital.
12. If there are diminishing returns to capital, then
a.
capital produces fewer goods as it ages.
b.
old ideas are not as useful as new ones.
c.
increases in the capital stock eventually decrease output.
d.
increases in the capital stock increase output by ever smaller amounts.
13. All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by
one unit?
a.
Output will rise by more than it did when the previous unit was added.
b.
Output will rise but by less than it did when the previous unit was added.
c.
Output will fall by more than it did when the previous unit was added.
d.
Output will fall but by less then it did when the previous unit was added.
14. All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last year and by 100
units this year,
a.
the increase in output was greater for this year than last year.
b.
the increase in output was greater last year than this year.
c.
the increase in output is the same in both years.
d.
None of the above is necessarily correct.
15. Country A and country B are the same except country A currently has more capital. Assuming diminishing returns, if
both countries increase their capital by 100 units and other factors that determine output are unchanged, then
a.
output in country A increases by more than in country B.
b.
output in country A increases by the same amount as in country B.
c.
output in country A increases by less than in country B.
d.
None of the above is necessarily correct.
16. Country A and country B both increase their capital stock by one unit. Output in country A increases by 12 while
output in country B increases by 15. Other things the same, diminishing returns implies that country A is
a.
richer than Country B. If Country A adds another unit of capital, output will increase by more than 12 units.
b.
richer than Country B. If Country A adds another unit of capital, output will increase by less than 12 units.
c.
poorer than Country B. If Country A adds another unit of capital, output will increase by more than 12 units.
d.
poorer than Country B. If Country A adds another unit of capital, output will increase by less than 12 units.
17. Country A and country B both increase their capital stock by one unit. Output in country A increases by 10 while
output in country B increases by 8. Other things the same, diminishing returns implies that country A is
a.
richer than Country B. If Country A adds another unit of capital, output will increase by more than 10 units.
b.
richer than Country B. If Country A adds another unit of capital, output will increase by less than 10 units.
c.
poorer than Country B. If Country A adds another unit of capital, output will increase by more than 10 units.
d.
poorer than Country B. If Country A adds another unit of capital, output will increase by less than 10 units.
18. On a production function, as capital per worker increases, output per worker
a.
increases. This increase is larger at larger values of capital per worker.
b.
increases. This increase is smaller at larger values of capital per worker.
c.
decreases. This decrease is larger at larger value of capital per worker.
d.
decreases. This decrease is smaller at larger value of capital per worker.
19. According to the traditional view of the production function, which of the following values of the additions to output
per worker would be consistent with moving from 5 to 6, and then from 6 to 7, and then from 7 to 8 units of capital per
worker in that order?
a.
40, 40, 40
b.
40, 35, 38
c.
40, 34, 32
d.
40, 43, 48
20. All else equal, if there are diminishing returns, then what happens to productivity if both capital and labor increase?
a.
Productivity will definitely fall.
b.
Productivity will definitely be unchanged.
c.
Productivity will definitely rise.
d.
None of the above are necessarily correct.
21. All else equal, if there are diminishing returns and constant returns to scale, then what happens to productivity if
capital and labor both increase but capital increases by more?
a.
Productivity will definitely fall.
b.
Productivity will definitely be unchanged.
c.
Productivity will definitely rise.
d.
None of the above are necessarily correct.
22. The slope of the production function with capital per worker on the horizontal axis and output per worker on the
vertical axis
a.
is positive and gets steeper as capital per worker rises.
b.
is positive and gets flatter as capital per worker rises.
c.
is negative and gets steeper as capital per worker rises.
d.
is negative and gets flatter as capital per worker rises.
Figure 25-1. On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output
(Y) per worker (L).
23. Refer to Figure 25-1. The curve becomes flatter as the amount of capital per worker increases because of
a.
increasing returns to capital.
b.
increasing returns to labor.
c.
diminishing returns to capital.
d.
diminishing returns to labor.
24. Refer to Figure 25-1. The shape of the curve is consistent with which of the following statements about the economy
to which the curve applies?
a.
In the long run, a higher saving rate leads to a higher level of productivity.
b.
In the long run, a higher saving rate leads to a higher level of income.
c.
In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a higher growth
rate of income.
d.
All of the above are correct.
25. Refer to Figure 25-1. The shape of the curve is consistent with which of the following statements about the economy
to which the curve applies?
a.
In the long run, a higher saving rate leads to a higher growth rate of productivity.
b.
In the long run, a higher saving rate leads to a higher growth rate of income.
c.
Returns to capital become increasingly smaller as the amount of capital per worker increases.
d.
All of the above are correct.
26. Refer to Figure 25-1. Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2011,
then it will definitely remain at point A in 2012 if, between 2011 and 2012,
a.
the quantity of physical capital remains constant; the number of workers doubles; and human capital, natural
resources, and technology all double as well.
b.
the quantity of physical capital doubles; human capital, natural resources, and technology all double as well;
and the number of workers remains constant.
c.
the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources,
and technology all double as well.
d.
the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources,
and technology remain constant.
27. Other things the same, a country that increases its saving rate increases
a.
its future productivity and future real GDP.
b.
neither its future productivity nor future real GDP.
c.
its future productivity, but not its future real GDP.
d.
its future real GDP, but not its future productivity.
28. If a country's saving rate increases, then in the long run
a.
productivity is higher but real GDP per person is not higher.
b.
real GDP per person is higher but productivity is not higher.
c.
productivity and real GDP per person are both higher.
d.
neither productivity nor real GDP per person is higher.
29. Other things the same, a country that increases its savings rate will have
a.
higher future capital and higher future real GDP per person.
b.
higher future capital but not higher future real GDP per person.
c.
higher future real GDP per person but not higher future capital.
d.
neither higher future capital nor higher future real GDP per person.
30. Currently a country has real GDP per person of 500. Raising capital per worker by one would increase output per
worker by 4. Other things the same, which of the following long-run combinations are consistent with the effects of this
country increasing its saving rate?
a.
real GDP per person is 520 and raising capital per worker by one would increase output per worker by 3
b.
real GDP per person is 520 and raising capital per worker by one would increase output per worker by 5
c.
real GDP per person is 480 and raising capital per worker by one would increase output per worker by 3
d.
real GDP per person is 480 and raising capital per worker by one would increase output per worker by 5
31. In the long run, a higher saving rate
a.
cannot increase the capital stock.
b.
means that people must consume less in the future.
c.
increases the level of productivity.
d.
None of the above is correct.
32. In the long run, an increase in the saving rate
a.
doesn’t change the level of productivity or income.
b.
raises the levels of both productivity and income.
c.
raises the level of productivity but not the level of income.
d.
raises the level of income but not the level of productivity.
33. In the long run, a higher saving rate
a.
cannot increase the capital stock.
b.
increases the growth rate of income.
c.
increases the growth rate of productivity.
d.
None of the above is correct.
34. Other things the same, if a country raises its saving rate, then in the long run
a.
both the level and growth rate of real GDP are unchanged.
b.
the level of real GDP is higher but the growth rate of real GDP is unchanged.
c.
both the level and growth rate of real GDP are higher.
d.
None of the above are correct.
35. Other things the same, if a country raises its saving rate, when is productivity growth higher?
a.
as the economy moves toward the long run and in the long run.
b.
as the economy moves toward the long run, but not in the long run.
c.
in the long run, but not as the economy moves toward the long run.
d.
neither as the economy moves toward the long run, nor in the long run.
36. Other things the same, if a country raises its saving rate, when is growth of real GDP per person higher?
a.
as the economy moves toward the long run and in the long run.
b.
as the economy moves toward the long run, but not in the long run.
c.
in the long run, but not as the economy moves toward the long run.
d.
neither as the economy moves toward the long run, nor in the long run.
37. If a country were to increase its saving rate, then in the long run it would also increase its
a.
level of income.
b.
growth rate of income.
c.
growth rate of productivity.
d.
All of the above are correct.
38. If a country increases its saving rate, which of the following permanently grow at a higher rate?
a.
productivity and real GDP per person
b.
productivity but not real GDP per person
c.
real GDP per person but not productivity
d.
neither real GDP per person nor productivity
39. Suppose that a country increased its saving rate. In the long run it would have
a.
higher productivity, and another unit of capital would increase output by more than before.
b.
higher productivity, but another unit of capital would increase output by less than before.
c.
lower productivity, and another unit of capital would increase output by more than before.
d.
lower productivity, but another unit of capital would increase output by less than before.
40. If a country’s saving rate declined, then other things the same, in the long run the country would have
a.
lower productivity, but not lower real GDP per person.
b.
lower productivity and lower real GDP per person.
c.
lower real GDP per person, but not lower productivity
d.
neither lower productivity nor lower real GDP per person.
41. Suppose Turkey increases its saving rate. In the long run
a.
the growth rates of productivity and real GDP per person increase.
b.
productivity and real GDP per person increase.
c.
the growth rate of productivity increases, and real GDP per person increases.
d.
productivity increases, and the growth rate of real GDP per person increases.
42. Other things the same, if a country increased its saving rate, in 40 years or so it would likely have
a.
higher productivity, and a higher growth rate of real GDP.
b.
higher productivity, but not a higher growth rate of real GDP.
c.
the same productivity and growth of real GDP it began with.
d.
None of the above is correct.
43. Which of the following best describes the response of output as time passes to an increase in the saving rate?
a.
The growth rate of output does not change.
b.
The growth rate of output increases and gets even larger as time passes.
c.
The growth rate of output increases and does not change as time passes.
d.
The growth rate of output increases, but diminishes to its former level as time passes.
44. According to studies using international data, an increase in the saving rate
a.
does not increase the growth rate of output.
b.
increases the growth rate of output for a few years.
c.
increases the growth rate of output for about a decade.
d.
increases the growth rate of output for several decades.
45. Suppose that the U.S. undertakes a policy to increase its saving rate. This policy will likely
a.
have no impact on the growth rate of real GDP per person.
b.
decrease the growth of real GDP per person for a few years.
c.
increase the growth of real GDP per person for several decades.
d.
permanently increase the growth rate of real GDP per person.
46. Suppose that the U.S. undertakes a policy to increase its saving rate. This policy will likely
a.
have no impact on the level of real GDP per person.
b.
immediately and permanently decrease the level of real GDP per person.
c.
immediately and permanently increase the level of real GDP person.
d.
gradually raise the level of real GDP per person.
47. The short-run effects of an increase in the saving rate include
a.
a higher level of productivity.
b.
a higher growth rate of productivity.
c.
a higher growth rate of income.
d.
All of the above are correct.
48. The long-run effects of an increase in the saving rate include
a.
a higher level of productivity.
b.
a higher growth rate of productivity.
c.
a higher growth rate of income.
d.
All of the above are correct.
49. Suppose an economy experiences an increase in its saving rate. The higher saving rate leads to a higher growth rate of
productivity
a.
in the short run, but not in the long run.
b.
in the long run, but not in the short run.
c.
in both the short run and the long run.
d.
in neither the short run nor the long run.
50. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has
more capital per worker and so it has more real GDP per worker than the other. Finally, suppose that the saving rate in
both countries increases from 4 percent to 7 percent. Over the next ten years we would expect that
a.
the growth rate will not change in either country.
b.
the country that started with less capital per worker will grow faster.
c.
the country that started with more capital per worker will grow faster.
d.
both countries will grow and at the same higher rate.
51. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less
capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. In the
long run
a.
both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be
higher in the country with more capital.
b.
both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be
higher in the country with less capital.
c.
both countries will have higher levels of real GDP per person, and the temporary increase in growth in the
level of real GDP per person will have been greater in the country with more capital.
d.
both countries will have higher levels of real GDP per person, and the temporary increase in growth in the
level of real GDP per person will have been greater in the country with less capital.
52. Other things equal, relatively poor countries tend to grow
a.
slower than relatively rich countries; this is called the poverty trap.
b.
slower than relatively rich countries; this is called the fall-behind effect.
c.
faster than relatively rich countries; this is called the catch-up effect.
d.
faster than relatively rich countries; this is called the constant-returns-to-scale effect.
53. Two countries are the same, except one is poorer. Assuming the traditional assumption about the production function
is made there are
a.
diminishing returns to capital so the poor country grows slower.
b.
increasing returns to capital so the poor country grows slower.
c.
diminishing returns to capital so the poor country grows faster.
d.
increasing returns to capital so the poor country grows faster.
54. An increase in the saving rate would, other things the same,
a.
increase growth more for a poor country than for a rich country, and raise growth permanently.
b.
increase growth more for a poor country than for a rich country, but raise growth temporarily.
c.
increase growth more for a rich country than for a poor country, and raise growth permanently.
d.
increase growth more for a rich country than for a poor country, but raise growth temporarily.
55. Real GDP per person is $10,000 in Country A, $20,000 in Country B, and $30,000 in Country C. The saving rate
increases by the same rate in all three countries. Other things equal, we would expect that
a.
all three countries will grow at the same rate.
b.
Country A will grow the fastest.
c.
Country B will grow the fastest.
d.
Country C will grow the fastest.
56. Assuming diminishing returns,
a.
the increase in output growth from an increase in the saving rate rises over time, and that, other things the
same, rich countries should grow faster than poor ones.
b.
the increase in output growth from an increase in the saving rate falls over time, and that, other things the
same, rich countries should grow faster than poor ones.
c.
the increase in output growth from an increase in the saving rate rises over time, and that, other things the
same, poor countries should grow faster than rich ones.
d.
the increase in output growth from an increase in the saving rate falls over time, and that, other things the
same, poor countries should grow faster than rich ones.
57. The catch-up effect refers to the idea that
a.
saving will always catch-up with investment spending.
b.
it is easier for a country to grow fast and so catch-up if it starts out relatively poor.
c.
population eventually catches-up with increased output.
d.
if investment spending is low, increased saving will help investment to "catch-up."
58. The traditional view of the production process is that capital is subject to
a.
diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than
in rich countries.
b.
diminishing returns, so that other things the same, real GDP in poor countries should grow at a slower rate
than in rich countries.
c.
increasing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in
rich countries.
d.
increasing returns, so that other things the same, real GDP in poor countries should grow at a slower rate than
in rich countries.
59. The logic behind the catch-up effect is that
a.
workers in countries with low incomes will work more hours than workers in countries with high incomes.
b.
the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital.
c.
new capital adds more to production in a country that doesn't have much capital than in a country that already
has much capital.
d.
None of the above is correct.
60. Country A has real GDP per person of 100,000 while country B has real GDP per person of 200,000. All else constant,
country A will eventually have a higher standard of living than country B if
a.
the level of saving per person is 10,000 in country A and 10,000 in country B.
b.
the level of saving per person is 12,000 in country A and 15,000 in country B.
c.
Both of the above are correct.
d.
None of the above are correct.
61. Country A has real GDP per person of 250,000 while Country B has real GDP per person of 500,000. All else
constant, Country A will eventually have a higher standard of living than Country B if
a.
the level of saving per person is 5.000 in Country A and 7,500 in Country B.
b.
the level of saving per person is 3,000 in Country A and 6,000 in Country B.
c.
Both of the above are correct.
d.
None of the above are correct.
62. Which of the following countries benefited significantly from the catch-up effect in the last half of the twentieth
century?
a.
Ethiopia
b.
the United States
c.
Canada
d.
South Korea
