Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 15: Economic Growth: The Importance of the Long Run
1) Economic growth occurs whenever
A) nominal GDP increases.
B) real GDP increases.
C) potential GDP increases.
D) per-capita income increases.
E) per-capita GDP increases.
2) Per-capita GDP in the United States is approximately
A) $800.
B) $5,300.
C) $27,700.
D) $46,900.
E) $57,200.
3) Over the last 30 years, potential GDP has been increasing at a rate of about
A) 1 percent a year.
B) 2 percent a year.
C) 3 percent a year.
D) 4 percent a year.
E) 5 percent a year.
4) According to the rule of 72, if real GDP is increasing at
A) 3 percent a year, it will double in 72 years.
B) 2 percent a year, it will double in 24 years.
C) 4 percent a year, it will double in 18 years.
D) 6 percent a year, it will double in 9 years.
E) 9 percent a year, it will double in 12 years.
5) If real GDP is increasing at 6 percent a year, it will double in
A) 3 years.
B) 6 years.
C) 9 years.
D) 12 years.
E) 15 years.
6) If real GDP is increasing at
A) 4 percent a year, it will double in 72 years.
B) 2 percent a year, it will double in 24 years.
C) 4 percent a year, it will double in 18 years.
D) 6 percent a year, it will double in 9 years.
E) 9 percent a year, it will double in 12 years.
7) Which of the following is not a source of economic growth?
A) growth in the labor supply
B) growth in the capital stock
C) technological advances
D) increases in aggregate demand
E) education and training
8) The term “human capital” is used to describe
A) machinery that enhances labor’s productivity.
B) equipment that replaces labor.
C) knowledge and skill embodied in labor.
D) computers that perform human functions.
E) any human-made aids to production.
9) Which of the following would tend to increase private saving?
A) an increase in the federal budget deficit
B) higher marginal income tax rates
C) tax credits for firms that invest in productivity-enhancing equipment
D) allowing larger tax-deductible IRA contributions
E) a reduction in the federal budget deficit
10) When income tax rates are reduced, households tend to spend part of the additional take-
home pay they receive (as a result of the lower rates) and save the rest. As a consequence we can
say that a reduction in income tax rates
A) increases national saving.
B) increases private saving.
C) increases public saving.
D) increases both private saving and national saving.
E) increases both private and public saving.
11) When income tax rates are reduced, households tend to spend part of the additional take-
home pay they receive (as a result of the lower rates) and save the rest. This action also enlarges
the size of the federal government’s budget deficit (or reduces the size of its budget surplus). As
a consequence, we can say that a reduction in income tax rates will tend to
A) increase national saving.
B) increase both private saving and public saving.
C) increase public saving.
D) increase both private saving and national saving.
E) increase private saving but reduce public saving.
12) Which of the following is a true statement?
A) National saving is the total amount of saving done by households.
B) Budget deficits tend to increase public saving.
C) Public saving is done by government.
D) Tax reductions tend to increase public saving.
E) Public saving is another name for national saving.
13) According to our model, a reduction in federal income taxes would be likely to
A) increase consumption spending, private saving, and public saving.
B) increase consumption spending and private saving, but reduce public saving.
C) increase consumption spending and national saving.
D) decrease consumption spending, private saving, and public saving.
E) decrease consumption spending and private saving, but increase public saving.
14) Suppose that the federal government reduced personal income taxes by $200 billion. This
action would probably
A) increase consumption spending by $200 billion.
B) increase private saving by $200 billion.
C) increase both consumption spending and private saving.
D) increase consumption spending, but reduce private saving.
E) decrease consumption spending, but increase private saving.
15) A reduction in personal income taxes tends to
A) increase private saving because when taxes are reduced households find themselves with
more disposable income and they tend to save a portion of that income.
B) lower private saving because when taxes are reduced households anticipate further tax
reductions and defer saving for the future.
C) lower private saving because the tax reduction enlarges the federal government’s budget
deficit or reduces the size of its budget surplus.
D) increase public saving because the tax reduction enlarges the federal government’s budget
deficit or reduces the size of its budget surplus.
E) None of the above are true.
16) If a tax increase resulted in a larger surplus in the federal budget, this action would probably
A) increase private saving.
B) increase consumption spending by households.
C) reduce public saving.
D) reduce private saving, but increase public saving.
E) reduce both private and public saving.
17) Which of the following would lead to lower interest rates?
A) an increase in the size of the federal government’s budget deficit
B) replacing the federal income tax with a consumption tax
C) investment tax credits which spur borrowing and investment
D) policies that encourage individuals to invest more in education and training
E) policies that discourage contributions to IRA accounts
18) The three stages of research and development are
A) discovery, research, and invention.
B) discovery, invention, and innovation.
C) invention, discovery, and application.
D) discovery, invention, and application.
E) research, invention, and innovation.
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19) The process of converting an invention into something marketable is called
A) discovery.
B) invention.
C) innovation.
D) application.
E) research.
20) Which of the following would not tend to enhance labor productivity?
A) increases in the level of education
B) providing workers with more capital equipment
C) increases in the supply of labor
D) technological advances which lead to better machines
E) enhanced training
21) Which of the following policies would supply-side economists be most likely to support?
A) an industrial policy aimed at stimulating industries critical to the economy’s growth
B) a commitment to enlarging the federal budget surplus
C) investment tax credits designed to stimulate investment in productivity enhancing equipment
D) expanded basic research conducted in federal laboratories
E) increasing the role of the federal government in guiding research and development efforts
22) According to the 1972 “Limits of Growth” study, this planet will ultimately face a sudden
and uncontrollable decline in both population and industrial capacity. This conclusion is based
on
A) a study of the United States’ experience.
B) a study of India’s experience.
C) an extrapolation of the problems facing North America.
D) analysis of satellite photos.
E) a computer simulation of likely future outcomes.
23) Economists tend to be more optimistic about the future than environmentalists because
A) of their confidence in the resilience of the environment.
B) they believe that market incentives will alter future behavior.
C) they are confident that government will be able to prevent any undesirable outcomes.
D) they place little value on the environment.
E) they believe that our resources are essentially unlimited.
1) Economic growth is defined as
A) an increase in GDP per capita.
B) an increase in real GDP.
C) an increase in potential GDP.
D) an increase in GDP.
2) According to the rule of 72, if potential GDP is expanding at a rate of 3 percent a year, then
potential GDP doubles in approximately
A) 72 years.
B) 18 years.
C) 24 years.
D) 36 years.
3) The most common measure of an economy’s standard of living is
A) median family income.
B) per-capita income.
C) GDP per capita.
D) average household income.
4) In 2008, U.S. GDP per capita was approximately
A) $24,000.
B) $47,000.
C) $56,000.
D) $17,000.
5) The country with the standard of living most closely approximating the United States is
A) Germany.
B) France.
C) South Korea.
D) United Arab Emirates.
6) If a country’s population is increasing at 2 percent a year and its real GDP is increasing at 5
percent a year, then per capita real GDP will be
A) rising at a rate of 7 percent a year.
B) falling at a rate of 2 percent a year.
C) rising at a rate of 3 percent a year.
D) falling.
7) Population growth, by itself, may do little to raise the standard of living because
A) any increase in real GDP must be divided among a larger population.
B) without additional capital, there can be no increase in real GDP.
C) people are not an economic resource.
D) population growth inevitably leads to inflation.
8) The term human capital refers to
A) machines, tools and factories.
B) money.
C) the knowledge and skills of workers.
D) None of the above.
9) Which of the following would tend to increase private saving?
A) providing investment tax credits to firms that invest in eligible equipment
B) reducing the size of the federal budget deficit
C) reducing the size of the tax-deductible contributions that households are allowed to make to
Individual Retirement Accounts
D) replacing the federal income tax with a consumption tax
10) Policies that increase the supply of loanable funds lead to more investment spending because
they
A) reduce the taxes of firms which increase their investment spending.
B) lower the interest rate and thereby encourage borrowing.
C) make firms more optimistic about the future.
D) lower the price level in the economy.
11) Suppose that a change in tax policies causes households to save more but increases the size
of the budget deficit. In that case, the policy would
A) increase both private and public saving.
B) decrease both private and public saving.
C) increase private saving but reduce public saving.
D) increase public saving but reduce private saving.
12) Investment tax credits tend to
A) increase the supply of loanable funds and reduce interest rates.
B) increase the supply of loanable funds and raise interest rates.
C) increase the demand for loanable funds and reduce interest rates.
D) increase the demand for loanable funds and raise interest rates.
13) Which of the following policies would a supply-side economist be least likely to support?
A) cuts in marginal tax rates designed to spur work effort
B) investment tax credits designed to stimulate investment spending
C) an industrial policy intended to promote technological advances
D) tax incentives to spur saving by households
14) Suppose households are saving $500 billion a year, all state and local governments together
have a budget surplus of $300 billion, and the federal government has a $150 billion deficit. How
much is national saving?
A) $350 billion
B) $500 billion
C) $650 billion
D) $950 billion
15) Deficit spending may slow the rate of economic growth
A) by raising interest rates and lowering investment spending.
B) by increasing the level of national saving.
C) by reducing aggregate demand.
D) by lowering consumption spending by households.
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16) Patents are most likely to encourage research and development when?
A) the new product or process is discovered by accident.
B) the cost of developing the new product or process was minimal.
C) a major investment was required in order to develop the new product or process.
D) Both A and B are true.
17) Under an industrial policy
A) all businesses would receive substantial tax breaks to encourage research and development.
B) corporate income taxes would be reduced to provide additional funds for research and
development.
C) government policymakers would select critical industries to receive tax incentives and other
support for research and development.
D) tax incentives would be used to encourage saving, lower interest rates, and encourage
spending for research and development.
18) Rising incomes may pose a threat to the environment because
A) this trend generally leads to less-rapid population growth.
B) this trend generally leads to more-rapid population growth.
C) rich people tend to care less about the environment.
D) rich people consume more resources per capita.
19) Economists argue that present trends in population, food production, and resource depletion
will probably not continue because
A) as resources become scarcer, prices will rise and lead to conservation.
B) new technologies will be developed to conserve scarce resources and augment food supplies.
C) as incomes rise, population growth rates tend to slow.
D) All of the above.
20) Robert Solow argues that government may need to supplement market forces to avoid the
eventual destruction of the environment. He bases this recommendation on the fact that
A) resource scarcity does not appear to alter the behavior of consumers or businesses.
B) government policymakers always have better foresight than markets.
C) markets do not adequately consider the distant future.
D) population growth rates appear to be independent of economic variables such as income.
1) Economic growth occurs whenever
A) nominal GDP increases.
B) real GDP increases.
C) population increases.
D) potential GDP increases.
2) Over the last 30 years, the U.S. economy’s potential GDP appears to have grown at
approximately
A) 1 percent a year.
B) 2 percent a year.
C) 3 percent a year.
D) 5 percent a year.
3) Which of the following is the most common measure of an economy’s standard of living?
A) income per person
B) GDP per person
C) real GDP
D) the percent of the population in poverty
4) According to the rule of 72, if potential GDP is growing at
A) 6 percent a year, it will double every 24 years.
B) 4 percent a year, it will double in approximately 29 years.
C) 3 percent a year, it will double every 24 years.
D) 4. 2 percent a year, it will double in approximately 45 years.
5) Which of the following would enhance a society’s stock of human capital?
A) an increase in population
B) an increase in the size of the labor force
C) providing workers with more or better equipment
D) improving the training of workers
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6) In 2008, the U.S. GDP per capita was approximately
A) $47,000.
B) $27,000.
C) $10,000.
D) $77,000.
7) Which of the following is an example of physical capital?
A) money
B) a share of stock
C) a machine
D) None of the above
8) The most important source of economic growth is
A) population growth.
B) enhancements in the stock of physical capital.
C) technological advances.
D) the discovery of new supplies of natural resources.
9) National saving is the sum of
A) personal saving and business saving.
B) public saving and private saving.
C) farm and nonfarm saving.
D) long-term saving and short-term saving.
10) Which of the following policies would tend to increase private saving?
A) replacing the federal income tax with a consumption tax
B) reducing the allowable amount of tax-deductible contributions to IRA accounts.
C) enlarging the federal government’s budget surplus
D) increasing the tax on interest income
11) A tax increase would tend to
A) increase the disposable income of households and therefore increase private saving.
B) reduce the disposable income of households and therefore reduce private saving.
C) reduce the size of the budget deficit (or increase the size of the budget surplus) and therefore
decrease public saving.
D) None of the above.
12) A tax reduction tends to
A) increase national saving because it increases private saving.
B) decrease national saving because it reduces private saving more than it increases public
saving.
C) increase national saving because it increases private saving more than it decreases public
saving.
D) decrease national saving because it reduces public saving more than it increases private
saving.
13) When personal income taxes are reduced, this policy tends to
A) increase the disposable incomes of households, so it leads to more consumption spending
and more private saving. Anything that raises private saving must also raise national saving.
B) increase private saving. But because it also enlarges the budget deficit it lowers public saving.
Public saving will fall by more than private saving rises, so national saving will decline.
C) reduce the disposable incomes of households, so it leads to less consumption spending and
less private saving. Anything that lowers private saving must also lower national saving.
D) reduce private saving. But because it also enlarges the budget deficit it raises public saving.
Public saving will rise by more than private saving falls, so national saving will increase.
14) Investment tax credits attempt to encourage investment by
A) lowering the prevailing interest rate.
B) increasing the supply of loanable funds.
C) reducing taxes for firms which undertake investments.
D) raising taxes to lower the size of the budget deficit.
15) Technological progress involves three stages. These stages are (in order)
A) research, invention, and discovery.
B) discovery, research, and invention.
C) research, discovery, and innovation.
D) research, invention, innovation.
16) The term “basic research” describes
A) research to discover new products to better our everyday lives.
B) research to gain knowledge for its own sake.
C) any research with a commercial purpose in mind.
D) research that is funded by private corporations rather than by the government sector.
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17) Which of the following is not true?
A) Tax incentives can stimulate research and development.
B) Most basic research is supported by the federal government.
C) Private firms tend to concentrate on basic research.
D) Lower interest rates may encourage firms to invest more in their research and development
efforts.
18) Which of the following would a supply-side economist be most likely to support?
A) deliberately enlarging the size of the federal government’s budget surplus
B) increased spending for research conducted in federal laboratories
C) targeted support for critical industries selected by government policymakers
D) tax incentives to spur saving by private households
19) While many economists see rising GDP per capita as a sign of achievement,
environmentalists see it as a problem. This is because
A) rich people care less about the environment than poor people.
B) rich people have more children than poor people.
C) rich people consume more resources per person than poor people.
D) All of the above.
20) Economists tend to be less concerned than environmentalists about depleting our natural
resource stocks because
A) their estimates of resource stocks are larger than those used by environmentalists.
B) their estimates of future rates of economic growth are lower than those employed by
environmentalists.
C) they have more faith that rising prices will help to conserve resources as they grow scarcer.
D) they anticipate much slower rates of population growth than environmentalists.
1) Economic growth is defined as any increase in real GDP.
2) Per-capita GDP in the United States was about $47,000 in 2005.
3) Over the past 30 years, potential GDP has increased by an average of 5 percent a year.
4) According to the “rule of 72,” if real GDP is growing at 6 percent a year, it will double in
approximately 12 years.
5) The term “physical capital” refers to machines and tools.
6) The term “human capital” refers to labor-saving machinery.
7) Technological change is generally regarded as the most important source of economic growth.
8) In the long run, interest rates are determined by the demand and supply of loanable funds.
9) Public saving is the term used to describe saving done by households.
10) National saving is the sum of private and public saving.
11) Eliminating the federal tax on interest income may encourage private saving.
12) Budget deficits increase national saving.
13) A tax reduction tends to increase both private and public saving.
14) Budget deficits lead to higher interest rates and thereby reduce investment.
15) Innovation is the process of converting an invention into something marketable.
16) In the United States, most basic research is supported by the federal government.
Question Status: Previous Edition
17) Increasing the length of the period for which patents are granted is viewed by economists as
a costless way of encouraging research and development.
18) Supply-side economists tend to oppose government budget surpluses.
19) The 1972 “Limits to Growth” study was based on studies conducted in India and other
developing nations.
20) Robert Solow believes that concerns about the impact of economic growth on the
environment are overblown.
21) A deficit-financed increase in government spending would tend to reduce the supply of
loanable funds.
22) If government policymakers succeeded in cutting both taxes and government spending by
$100 billion, the likely result would be an increase in national saving (because households would
save some portion of their increase in disposable income).
23) Private firms prefer to invest in basic research rather than innovation.
24) Government spending to improve the educational system is more likely to promote economic
growth than is spending for improved retirement benefits for our elderly.
25) The Lifetime Learning Tax Credit is intended to stimulate private saving.
1) How does the “rule of 72” help to illustrate the benefits of economic growth?
2) Explain in a step-by-step fashion how an increase in the federal budget surplus can help to
stimulate economic growth.
3) The text argues that an increase in the labor-force participation rate is a more promising
avenue for increasing living standards than is an increase in population. Discuss.
4) How is it possible for a tax cut to increase private saving but reduce national saving?
5) Why might replacing the federal income tax with a consumption (or expenditure) tax help to
promote economic growth?
6) Discuss the policies that might be employed to stimulate technological progress.
7) Why do supply-side economists prefer to stimulate saving through tax incentives rather than
through budget surpluses?
8) Discuss the content of the 1972 “Limits to Growth” study and economists reactions to the
study.