ANSWERS, SOLUTIONS, AND EXERCISES
PROBLEM SET
1 a. Increased immigration—The labor supply curve would shift rightward. Full
employment output would rise, but productivity (measured by output per hour
worked) would fall because of diminishing returns to labor. Assuming that the
b. An aging population with an increasing proportion of retirees—In this answer, we
assume the total population remains constant, and that only its age distribution
changes. In this case, the labor supply curve would shift leftward. Full
c. A decline in the tax rate on corporate profits—This would increase investment
spending and capital formation. The production function would shift upward more
d. A reduction in unemployment benefits—This would shift the labor supply curve
rightward. Full-employment output would rise, and productivity would fall. The
e. The development of the Internet—This is an example of a technological change that
enables the economy to produce more output with the same resources. The
production function would shift upward, and there would be increases in
1. a.
1950 1990
France and Japan appear to be catching up to the United States; Kenya and India
229
230 Instructor’s Manual for Economics: Principles and Applications, 6e
are falling behind.
b. At the current growth rates, France would catch up to the United States about 19
years after 1990, or in the year 2009. In that year, U.S. GDP per capita would be
2. a. and b.
population Growth
Rate (from
previous year)
Output
($billions)
Output Growth
Rate (from
previous year)
Output per
Capita
Output
per Capita Growth Rate
(from previous year)
2002
—
$475.00
—
$4,750
—
2003
4.0%
$484.50
2.0%
$4,659
–1.9%
2004
2.9%
$516.75
6.7%
$4,829
3.7%
2005
0.9%
$555.75
7.5%
$5,146
6.6%
2006
1.9%
$570.00
2.6%
$5,182
0.7%
3.
An increase in the capital stock will shift the production function upward, from PF1
(solid line) to PF2 (dotted line). For a given number of workers, real GDP will increase
from GDPA to GDPB. However, the increase in the capital stock makes workers more
Chapter 21 Economic Growth and Rising Living Standards 231
4.
A decrease in the capital stock would shift the production function downward. For a
given number of workers, production will fall from point A to point B, and real GDP
will fall from GDP1 to GDP2. However, the decrease in capital stock makes workers
less productive, and as the labor demand curve shifts leftward, fewer workers will be
5. a. True. The increase in employment leads to a movement rightward along the
b. True. The increase in the capital stock will shift the production function upward,
increasing real GDP, and then the increased productivity of labor may cause an
c. False. If growth is coming from investment in capital alone, then real GDP per
capita would eventually have to grow at a decreasing rate, because of diminishing
6. In the following diagram, the unmarked PPF represents the initial position. A constant
rate of planned investment that exceeds depreciation will shift the frontier upward to
the one marked a. Alternatively, a constant rate of investment that is less than the rate
232 Instructor’s Manual for Economics: Principles and Applications, 6e
7.
Year 1 Year 2 Year 3 Year 4
Use the equation % output per capita = % productivity + % average hours + %
EPR to find:
Capital Goods per
Period
Consumption
Goods per
Period
PPFH
S
N
J
H
R
Chapter 21 Economic Growth and Rising Living Standards 233
8.
If it does relate to the previous question then: From Year 1 to Year 2, % output = %
productivity + % average hours + % EPR + % population = 5% – 11% – 7% +
9. For this Problem, we can use the rule that % Real GDP per capita = % Productivity
+ % Average hours + % EPR.
14. The statement is true. As long as the EPR does not change, a continual increase in
population will translate into a continual increase in labor input. Combined with a
constant capital stock, this implies continual growth in real GDP as the economy
234 Instructor’s Manual for Economics: Principles and Applications, 6e
MORE CHALLENGING
15. a. The first step in answering this question is to compute the net growth rate of the
capital stock as the difference between the investment rate and the depreciation
rate. Here, that is 4% – 2% = 2%, so the capital stock is growing. Therefore, the
b. In this case, the capital stock grows by 4% – 2% = 2% per year. As a result, the
PPF will continue to shift outward. The population (and therefore the labor force)
c. In this scenario, the capital stock is shrinking because the depreciation rate (2%)
exceeds the rate of investment (1%). The PPF will shift inward over time. And
13. War would have complex effects on a country’s PPF. On the one hand, a war would
wipe out some of the country’s existing capital stock, moving the PPF inward. Also,
resources would be shifted toward military goods production, and away from
EXPERIENTIAL EXERCISES
1 Technological change is an important impetus of economic growth. Refer to the
“Technology” column in the Marketplace section of a recent Wall Street Journal. Find
a story about some technological innovation that seems interesting to you. How will
16. Investment in computing technology is often cited as a source of economic growth. To
learn more, read Adam Zaretsky’s “Have Computers Made Us More Productive? A
Puzzle” from the St. Louis Fed, at
http://research.stlouisfed.org/publications/regional/98/10/ComputersProductive.pdf.
Based on what you’ve learned, use the model developed in this chapter to show how