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CHAPTER 20: LONG-RUN ECONOMIC GROWTH:
ORIGINS OF THE WEALTH OF NATIONS
Additional Questions
Essay Questions and/or Problems:
1. According to Edward Denison, what were the main sources of U.S. growth between 1929 and
1982? Which were the most important?
2. In the neoclassical model, explain the difference between a transition period and a steady state.
What are the primary sources of growth in the transition period, and how does it differ from the
steady state?
3. Explain the term “constant returns to scale.” Define the term “diminishing marginal returns”. Can a
production function exhibit both of these properties?
4. Consider two countries that are exactly the same except that one country A has a higher rate of
technology growth than country B. Which country will grow faster in the long-run? Which country
will be richer in the long-run? Use a graph of the aggregate production function to illustrate your
answer.
5. Consider two countries that are exactly the same except that one country A has a higher savings
rate than country B. Which country will grow faster in the long-run? Which country will be richer
in the long-run? Use a graph of the aggregate production function to illustrate your answer.
6. Reconsider question #5. Would you get the same answer in a model of endogenous growth? Would
you expect convergence to occur? Explain.
7. Consider two countries that are exactly the same except that one country A has a higher
depreciation rate than country B. Which country will grow faster in the long-run? Which country
will be richer in the long-run? Use a graph of the aggregate production function to illustrate your
answer.
8. Reconsider question #7. Would you get the same answer in a model of endogenous growth? Would
you expect convergence to occur? Explain.
Additional Essay Questions and/or Problems:
9. What are the three main determinants of level of output in the economy? Using the graphical
analysis of the aggregate production function, explain how each of the factors you list enters into
the output process. Which of these factors affect growth in the long-run? Why?
10. Discuss what the neoclassical growth model has to tell us about why technology growth and output
growth differs across countries in the long-run? Provide a graph of the aggregate production
function to illustrate why the sources of technology growth are critical to understanding output
growth.
11. Suppose that a government permanently cuts taxes on capital investment, but at the cost of running
a permanently larger budget deficit. Using the neoclassical growth model, predict the effect of this
policy on the level of output in the short-run and in the long-run? What is the effect of this policy
on the growth of output in the short-run and in the long-run? Provide graphs to support your
answer, being clear about the assumptions you are making when you provide your answer.
12. Suppose that a government imposes limits on the number of children people can have. According
to the neoclassical growth model, what impact is this policy likely to have on the level of income in
the long-run? On levels of output growth in the long-run? Provide a graph of the aggregate
production function to illustrate.
13. Is convergence better described as absolute or conditional? Explain your answer using both the
neoclassical growth theory and evidence on cross-country growth.
14. Do endogenous growth models predict convergence? Why or why not?
15. Consider a natural disaster that destroys a large fraction of a country’s capital stock. What impact
is this disaster likely to have on a country’s level of income in the short-run? In the long-run? What
224 CHAPTER 20
impact is this disaster likely to have on a country’s level of growth in the short-run? In the long-
run?
16. Consider the impact of a technological development that reduces depreciation and allows capital to
be useful for longer. Analyze the impact of this change within the neoclassical growth model.
17. a. Consider a neoclassical growth model that is at its steady state level of capital per worker. Now
assume that this country receives a gift of foreign aid in the form of capital. What should happen to
per-capita output levels and growth in the short-run and long-run as a result of this aid? Provide a
diagram to illustrate.
b. Now suppose that this country has a current capital stock of $500B. How will a $100B gift
affect per-capita output levels and growth in the short-run and long-run? Provide a Solow
diagram to illustrate.
c. What do your answers to b and c indicate about why aid has not been effective in increasing
growth among developing countries?
18. In the neoclassical growth model, how is an increase in technology growth different from an
increase in the savings rate? Explain, using diagrams to illustrate.
Multiple-Choice Questions:
1. In the neoclassical growth model, an increase in the saving rate will
2. In the neoclassical growth model, n increase in the saving rate results in
3. In the neoclassical model, an increase in the savings rate
4. According to Edward Denison’s estimates, the largest proportion of economic growth during the
1929-82 period was
5. Between 1929 and 1982, according to Edward Denison, approximately
6. Which of the following statements is (are) correct? According to United States data,
7. The primary difference between the neoclassical growth model and endogenous growth models is
that
8. Convergence refers to the idea that cross-country
9. Capital deepening occurs when
10. Steady-state growth refers to
11. In the neoclassical growth model, an increase in the saving rate will
12. Which of the following statements is (are) correct?
13. Recent research in growth theory extends the traditional analysis by making the rates of
14. Assuming constant returns to scale, the equation, Y = A(t)F(K,N) can be rewritten as
15. According to the neoclassical growth model, economic growth occurs because of
16. According to growth accounting estimates, during the 1929-1982 period, increases in capital and
labor account for about ______ of total growth.
17. The fact that long-run growth in the U.S. has been relatively stable is consistent with the ______
model.
18. Robert Solow is one of the developers of
19. Which of the following statements is correct with respect to endogenous growth models?
20. The production function Y = AKαL1-α exhibits
21. According to Edward Denison, the United States has experienced
22. According to Edward Denison, during the 1929 and 1982 period, capital formation
23. In the neoclassical growth model, break-even investment must cover
24. In a steady-state, sustained increases in the capital-to-labor ratio are only possible if
25. In the neoclassical growth model without technological progress, the steady-state growth rate of
per capita output is
26. In the neoclassical growth model without technological progress, in the steady-state the level of
capital increases at
27. If the savings rate of Country A increases from 10% to 20% and technology growth is zero, then
the neoclassical model predicts that in the steady state
28. International data suggests that countries with different steady states will
29. In the neoclassical growth model, if two countries are exactly the same but one has a lower
population growth, we would expect that country to have
30. Convergence refers to the movement of countries toward
31. Which of the following policies are likely to increase national savings?
32. Over the last 40 years in the U.S.
33. Endogenous growth theory rejects the assumption of exogenous
34. In the neoclassical growth model, if two countries are exactly the same but one has a higher
savings rate, we would expect that country to have
35. A constant returns to scale production function means that if all inputs are halved then output will
36. If the population of Country A grows at 3% a year but technology growth is zero, then the
neoclassical model predicts that in the steady state
37. Which of the following policies is not aimed at stimulating technological progress?
38. The neoclassical growth model argues that the only way to increase growth in the long-run is
39. According to the neoclassical growth model, economic growth in the steady state occurs because
of
40. In the neoclassical growth model, if two countries are exactly the same but one has a lower
depreciation rate, we would expect that country to have
41. Many rapidly developing countries in East Asia have pursued government policies, which
encourage savings. According to the neoclassical growth model, if these policies stimulate savings
but do not encourage technology growth, then these policies
42. International data suggests that
43. In the neoclassical growth model, if two countries are exactly the same but one has a lower
permanent budget deficit, we would expect that country to have
44. Economies of scale refer to
45. In the neoclassical growth model, an increase in the saving rate will
46. According to Edward Denison, during the 1929-1982 period, real output grew at an annual rate of
47. In the neoclassical growth model, convergence is conditional upon two countries having
48. According to Edward Denison, the major source of labor productivity is
49. The “A” in the neoclassical production function incorporates
50. Endogenous growth models
51. According to the neoclassical growth model, in a steady state with no technology growth:
52. According to the neoclassical growth model, if a country makes a policy change to increase its
savings rate, in the new steady state:
53. If an economy is growing at 2 percent a year but its rate of technology growth is 1 percent a year,
then this country must be:
54. Data on convergence suggests:
55. In the neoclassical growth model, the rate of technological process is: