21) Which of the following ideas apply to the neoclassical growth theory?
I. The rate of technological change influences the rate of economic growth.
II. Technological change promotes saving and investment.
III. Convergence of economic growth rates across countries
A) I only
B) III only
C) I and II
D) I, II and III
22) Which of the following ideas apply to the neoclassical growth theory?
I. Technological change results from chance.
II. Growth in real GDP stops if technology stops advancing.
A) I only
B) II only
C) both I and II
D) neither I nor II
23) Neoclassical growth theory attributes economic growth to
A) technological change.
B) fiscal policy.
C) the law of diminishing returns.
D) increasing population growth.
A recent article states that “…gains from two centuries of rapid technological innovation are
largely exhausted, and new discoveries lack the same revolutionary quality….{Further}, 80
percent of the growth between 1950 and 1993 came from the new application of old ideas, and
these old ideas are now mostly wrung dry.”
(The Economist, 03/03/2011)
24) If this quote is TRUE, what would the neoclassical growth theory predict?
A) Economic growth stops because most technological advances have already been made.
B) Economic growth is temporary regardless of technological change and GDP per person
returns to subsistence levels.
C) Economic growth will persist indefinitely because technological change will accelerate again
as firms seek profits.
D) Economic growth will accelerate because these technological changes are permanent.
25) The neoclassical growth theory says, in part, that
A) a population explosion driven by economic growth will end economic growth.
B) technological change leads to economic growth.
C) the differences in nation’s growth rates will persist indefinitely.
D) technology does not play a role in economic growth.
26) In neoclassical growth theory, technological change ________.
A) occurs by chance
B) is influenced by population growth
C) is influenced by the rate of economic growth
D) occurs at a steady rate
27) An assumption of neoclassical growth theory is that
A) technological change is random.
B) technological change can be influenced by savings.
C) more growth encourages more technological change.
D) None of the above answers is correct.
28) Neoclassical growth theory assumes that technological progress
A) is determined by investment.
B) is determined by saving.
C) responds to economic incentives.
D) is a purely chance event.
29) Neoclassical growth theory proposes that
A) technological progress increases the population growth rate and drives down real wages.
B) real GDP per person grows because technological change increases profit opportunities.
C) real GDP growth is caused by growth in the population.
D) discoveries result from choices that increase profits.
30) Within neoclassical growth theory, technological change ________ saving and ________
investment.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
31) Neoclassical growth theory is based on the proposition that real GDP per person grows when
A) the population growth rate increases.
B) the population growth rate decreases.
C) technological advances occur.
D) saving decreases.
32) According to neoclassical growth theory, the higher real GDP per person from economic
growth will
A) not last because the population will increase.
B) last because there is no link between growth and population.
C) last indefinitely regardless of any other factor.
D) last as long as technological change continues.
33) Neoclassical growth theory predicts that
A) advances in technology increase the productivity of capital, which leads to an increase in
investment and rising real GDP per person.
B) advances in technology are a result of discoveries motivated by the pursuit of profits.
C) growth in real GDP can increase without any increase in investment.
D) growth in real GDP can continue indefinitely.
34) Neoclassical growth theory
A) predicts that growth rates and incomes per person throughout the world will converge.
B) predicts that the faster growing underdeveloped nations will overtake and then surpass the
industrial nations.
C) predicts that nations that enjoy a technological advantage will maintain that advantage.
D) makes no predictions about the relative growth or incomes among countries.
35) Neoclassical growth theory predicts that China’s economic growth rate will ________.
A) decrease when the interest rate increases
B) continue at around 10 percent a year
C) always remain above the U.S. economic growth rate
D) eventually converge to the U.S. economic growth rate
36) A problem with the neoclassical growth theory is its
A) prediction that population growth lowers the real wage rate.
B) inability to explain persistent differences between countries’ GDP growth rates.
C) prediction that population growth raises the real wage rate.
D) comparison of the economy to a perpetual motion machine.
37) The notion that technological change is not random but instead is driven by the pursuit of
profits is an essential element of
A) classical growth theory.
B) neoclassical growth theory.
C) the new growth theory.
D) perpetual growth theory.
38) According to the new growth theory, competition
A) reduces profit.
B) increases profit.
C) has no impact on real profit, only nominal profit.
D) is only theoretical because all firms are growing at some rate.
39) According to new growth theory, technological change is driven by
A) random chance.
B) government policies.
C) foreign firms’ attempts to increase their sales in the domestic market.
D) firms’ attempts to increase their profit.
40) Because of the choices people make in the pursuit of profit, new growth theory argues that
A) technology growth slows down in the long-run.
B) population growth increases will bring real GDP per person back to subsistence level.
C) the capital stock experiences diminishing returns.
D) the economy can enjoy persisting economic growth.
41) ________ predicts that real GDP per person can grow indefinitely.
A) New growth theory
B) Classical growth theory
C) Profit growth theory
D) Neoclassical growth theory
42) New growth theory predicts that
A) economic growth is only temporary.
B) economic growth can last indefinitely.
C) economic growth is eroded by changes in taxes.
D) government policies can do nothing to foster increased growth.
43) A central proposition of the new growth theory is that
A) growth will cease but prosperity will persist.
B) knowledge is not subject to diminishing returns.
C) government direction and oversight is necessary for consistent growth.
D) growth is often just an illusion fostered by growth accounting.
44) New growth theory assumes that
A) all inputs experience diminishing returns.
B) only random technological advances produce growth.
C) knowledge does not experience diminishing returns.
D) None of the above answers is correct.
45) A key feature of the new growth theory is the assumption of
A) diminishing returns to labor.
B) diminishing returns to knowledge.
C) no diminishing returns to knowledge.
D) no diminishing returns to labor.
46) According to the new growth theory
A) the rate of technological progress is determined by chance.
B) knowledge is not subject to diminishing returns.
C) the labor demand curve does not shift rightward over time.
D) the concept of a labor market is not necessary.
47) According to new growth theory ________.
A) ever-advancing productivity keeps the population growth rate high
B) knowledge does not experience diminishing returns
C) growth rates and income levels per person around the globe will converge
D) knowledge is subject to the law of diminishing returns
48) Which theory emphasizes the significance of new discoveries that can be used by many
people at the same time?
A) neoclassical growth theory
B) new growth theory
C) classical growth theory
D) None of the above answers are correct.
49) Which of the following is NOT associated with the new growth theory?
A) natural resources
B) research
C) technology
D) innovation
50) New growth theory
A) dates from the 18th century.
B) concludes that economic growth is temporary.
C) states that economic growth arises from people’s choices.
D) asserts that population growth is the source of economic growth.
51) An important foundation of the new growth theory is that
A) we will get more technological advances the more the government is involved in deciding
which technology to pursue.
B) we will get more technological advances the greater the rewards people receive from making
technological advances.
C) the growth rate of the capital stock is more important than the growth rate of new knowledge
in generating economic growth.
D) improvements in labor productivity are poor measures of technological growth.
52) New growth theory economists believe that:
I. Economic growth can continue as long as we keep finding new ideas.
II. The marginal product of capital diminishes very rapidly, so we must rely upon technological
advances to create economic growth.
A) I only
B) II only
C) both I and II
D) neither I nor II
53) New growth theory proposes that real GDP per person grows because of ________ and that
growth ________.
A) the pursuit of profit; can persist indefinitely
B) productivity shocks; can persist indefinitely
C) technological change; can only increase above the subsistence level temporarily
D) productivity shocks; occurs randomly
54) Which growth theory models growth as a perpetual motion machine?
A) new growth theory
B) classical growth theory
C) neoclassical growth theory
D) all growth theories model growth as a perpetual motion machine
55) Which growth theory predicts perpetual growth?
A) classical growth theory
B) neoclassical growth theory
C) new growth theory
D) None of the above answers is correct.
56) The growth theory that predicts perpetual economic growth is
A) classical growth theory.
B) neoclassical growth theory.
C) the new growth theory.
D) real growth theory.
57) Which one of the following statements about growth theories is CORRECT?
A) In the new growth theory, knowledge is not subject to diminishing returns.
B) In neoclassical growth theory, technological progress is the result of rapid increases in saving
and investment in capital per person.
C) In classical growth theory, real GDP per person is unrelated to the subsistence real GDP.
D) In classical growth theory physical resources are unlimited.
58) Ongoing economic growth in real GDP per person requires all of the following EXCEPT
________.
A) investment in human capital
B) the discovery of new technologies
C) saving and investment in new capital
D) population growth
59) Which of the following has NOT been one of the primary sources of economic growth over
the last 200 years?
A) investment in new capital
B) resource conservation
C) investment in human capital
D) discoveries of new technology
60) Which of the following policy actions could speed productivity growth?
I. Tax incentives to encourage saving
II. Encouraging international trade
III. Directing public funds toward financing basic research
A) II only
B) I and III
C) I only
D) I, II, and III
61) A higher saving rate leads to faster growth because
A) more saving produces greater additions to capital per hour of labor, raising real GDP per
person.
B) capital would wear out faster.
C) people could consume more of an economy’s output.
D) population growth would accelerate.
62) If the saving rate increases, a country’s growth rate of real GDP per hour of labor ________
and capital per hour of labor ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
63) Savings is an important factor influencing economic growth because saving
A) can finance new investment and capital formation.
B) helps the economy maintain the current level of total expenditures when a recession begins.
C) provides a fund for wages needed from any unexpected population growth.
D) All of the above answers are correct.
64) Which of the following statements is CORRECT?
I. Higher savings rates can stimulate economic growth.
II. Limiting international trade can stimulate economic growth.
A) I only
B) II only
C) both I and II
D) neither I nor II
65) One policy that would increase the saving rate would be
A) raising taxes on the returns to saving.
B) raising taxes on the returns to investment.
C) taxing consumption.
D) raising taxes on saving.
66) To achieve faster growth, one possibility is to tax
A) consumption.
B) saving.
C) hiring.
D) immigration.
67) Activities that encourage faster growth are
A) investment in new capital and human capital.
B) high levels of consumption and low levels of savings.
C) taxes on saving that serve to encourage more spending and less saving.
D) developing trade barriers to protect national industries.
68) Which of the following policies improves prospects for more rapid economic growth?
A) policies to increase government expenditure
B) limitations on international trade
C) policies to increase the educational attainment of the labor force
D) encouragement of political instability
69) All of the following lead to more rapid economic growth EXCEPT
A) restricting international trade.
B) encouraging higher rates of saving.
C) supporting more research and development.
D) encouraging higher quality education.
70) A country would achieve faster growth by ________.
A) encouraging free trade
B) increasing the cost of education
C) increasing union membership
D) taxing income and not consumption
71) Several factors are important for achieving faster economic growth. Which of the following
is one of those factors?
A) expansion of international trade
B) increased government expenditure
C) increased taxes on saving
D) promotion of consumption expenditure
72) Economic growth tends to be higher in a country that
A) has a low savings rate.
B) has an economy open to international trade.
C) has an undeveloped system of property rights.
D) does not grant patents to inventors.
73) The relationship between education and economic growth can best be summarized by saying
that
A) educated people are less apt to consume goods that deplete economic resources, which
encourages economic growth.
B) educational expenditures tend to divert funds from productive investments, which discourages
economic growth.
C) educational expenditures tend to be inflationary, which discourages economic growth.
D) education has benefits beyond those who receive the education, which encourages economic
growth.
74) All of the following would increase the growth rate of the economy EXCEPT
A) raising the saving rate.
B) stimulating research and development.
C) discouraging international trade.
D) None of the above answers is correct because they all would increase the growth rate.
75) Which of the following will NOT work to increase the rate of economic growth?
A) increase saving
B) limit competition from international trade
C) improve the quality of education
D) All of the above will work to increase the rate of economic growth.
76) All of the following would stimulate economic growth EXCEPT
A) decreasing taxes on consumption (for instance, decreasing a sales taxes) and increasing
income taxes.
B) subsidizing basic research.
C) decreasing tuition charges at state universities.
D) encouraging international trade.
77) According to empirical evidence
A) providing international aid to developing nations stimulates economic growth.
B) providing international aid to developing nations does not have a positive effect on economic
growth.
C) international trade stimulates economic growth in richer nations, but actually slows economic
growth in developing economies.
D) international trade stimulates economic growth in developing economies, but actually slows
economic growth in richer nations.
78) Which theory of economic growth concludes that in the long run real GDP per person will be
at its subsistence level?
A) the classical theory
B) the neoclassical theory
C) the new growth theory
D) all of the theories
79) A factor that turned out to be a weakness of the classical theory of growth is its
A) emphasis on saving and investment.
B) assumption that the growth rate of the population increases when income increases.
C) reliance on constant growth in technology.
D) neglect of the subsistence real wage.
80) An assumption of the neoclassical theory of growth is that
A) people receive only subsistence real GDP per person.
B) all technological advances are the result of chance.
C) the marginal product of all types of capital increases as more capital is accumulated.
D) knowledge has diminishing returns.
81) In the neoclassical theory of growth, growth in ________ is the result of luck.
A) saving
B) income
C) technology
D) the real interest rate
82) A key assumption of new growth theory is that
A) all technological change is the result of luck.
B) higher incomes lead to a higher birth rate.
C) a successful innovator has the opportunity to earn a temporary, above-average profit.
D) the population growth rate is lower than the real interest rate.
83) Which theory of economic growth concludes that growth can continue indefinitely?
A) the classical theory
B) the neoclassical theory
C) the new theory
D) all of the theories
6 News Based Questions
1) The table below shows data for China.
Population
(millions)
Real GDP
(yuan,
billions)
2000
1267
4999
2003
1292
6498
2006
1315
8776
The economic growth rate in China between 2000 and 2003 was ________ percent.
A) 30
B) 37
C) 1.97
D) 98
2) The table below shows data for China.
Population
(millions)
Real GDP
(yuan,
billions)
2000
1267
4999
2003
1292
6498
2006
1315
8776
The standard of living between 2003 and 2006 increased by ________.
A) 55.3 percent
B) 1.8 percent
C) 35 percent
D) 32.7 percent
3) “IT Policy Can Spur Economic Growth, Industry Says”
As staffers on Capitol Hill know all too well, the growth of technology has created an economy
increasingly reliant on energy consumption, as BlackBerrys, laptops, and other devices become
everyday necessities. The right policies, however, can make IT growth a part of the energy
solution rather than the problem, IT representatives said Monday at a forum, in a congressional
office, hosted by the Information Technology & Innovation Foundation.
Information technology could reduce the expected growth in carbon emissions by one third over
10 years, said Daniel Castro, a senior analyst with the ITIF.
Information and communication technology has “great promise in driving economic growth as
well as reducing emissions,” added David Isaacs, director of government affairs for Hewlett-
Packard, but “policy should drive these results.”
www.news.cnet.com 11/17/2008
In order to drive economic growth in real GDP per person, the changes in information
technology that the article addresses must
A) cause a movement along the aggregate production function.
B) increase labor productivity.
C) increase labor supply.
D) decrease the demand for labor.
4) “Premier Liu Chao-shiuan announced Tuesday a government plan to distribute NT$82.9
billion (US$2.51 billion) in consumption coupons to Taiwan’s citizens in a bid to stimulate …
economic growth.”
www.etaiwannews.com 11/18/2008
The Premier’s plan to boost economic growth by boosting consumption
A) will work because employment will increase.
B) will work because there will be a movement out along Taiwan’s aggregate production
function.
C) will not work because real GDP per person will decrease.
D) will not work because economic growth is boosted by labor productivity, not consumption.
5) Hu Tells Leaders China Growth Will Help World Economy
Chinese President Hu Jintao told world leaders that his country “has taken an active part in the
international cooperation to deal with the financial crisis” by providing a “$586 billion economic
stimulus, focused on building low-rent housing, roads, railways and airports. The package also
allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will
also benefit from more subsidies.”
Hu stated that “China is in itself an important contribution to international financial stability and
world economic growth.”
www.bloomberg.com 11/15/2008
If the fiscal stimulus spending does generate economic growth, we can expect to see
A) growth in labor productivity.
B) growth China’s price level.
C) an excess supply of labor in China’s labor market.
D) growth in the supply of labor.
6) Hu Tells Leaders China Growth Will Help World Economy
Chinese President Hu Jintao told world leaders that his country “has taken an active part in the
international cooperation to deal with the financial crisis” by providing a “$586 billion economic
stimulus, focused on building low-rent housing, roads, railways and airports. The package also
allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will
also benefit from more subsidies.”
Hu stated that “China is in itself an important contribution to international financial stability and
world economic growth.”
www.bloomberg.com 11/15/2008
Which of the following will occur if China’s spending generates economic growth in real GDP
per person?
I. There will be an upward shift in China’s aggregate production function.
II. There will be a rightward shift in China’s labor demand curve.
III. There will be an increase in the real wage.
A) I and II only
B) I, II and III
C) I and III only
D) II and III only
7) Hu Tells Leaders China Growth Will Help World Economy
Chinese President Hu Jintao told world leaders that his country “has taken an active part in the
international cooperation to deal with the financial crisis” by providing a “$586 billion economic
stimulus, focused on building low-rent housing, roads, railways and airports. The package also
allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will
also benefit from more subsidies.”
Hu stated that “China is in itself an important contribution to international financial stability and
world economic growth.”
www.bloomberg.com 11/15/2008
China wants to increase investment because this change will
A) increase the growth in physical capital and speed up economic growth.
B) increase human capital.
C) cause an increase in the supply of labor.
D) not cause the real wage rate to increase so employment will increase.
8) Strategy to Address Dependence on Foreign Workers, Labour Market Demands
The prime minister of Malaysia announced his government’s “immediate focus would be to
enhance skills development and improve the quality of education.” By “the constant upgrading of
skills of the country’s workforce” he hoped to improve the country’s “global competitiveness and
raise average incomes of workers.”
www.thestar.com.my 11/21/2008
The story describes
A) a plan increase physical capital.
B) improvements in Malaysia’s incentive system.
C) a consequence of economic growth.
D) a plan to increase human capital.