SCHOOL OF ACCOUNTING, ECONOMICS & FINANCE

Intermediate Macroeconomics & Applications (ECON201)

Test 1

Wednesday, 15th March 2023

Time Allocated: 1 hour Total Marks: 100

INSTRUCTIONS TO STUDENTS:

▪ This test consists of Multiple Choice (MCQ) questions ONLY. All questions are
COMPULSORY.
▪ There are 20 Multiple Choice questions. Please answer the MCQS on the MCQ
answer sheet provided.
▪ Only entries in HB pencil will be recorded by the scanner. Each correct answer
will be awarded 5 marks. There is no negative marking.
▪ Please ensure that your name and student number appear on answer sheet.

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1. Assume a Cobb-Douglas production function where the share of capital and
labour is each 1/2. If the growth in total factor productivity is 2% and labour and
capital each grow by 2%, then:
A. output growth is 4% and the marginal product of capital is Y/(2K).
B. output growth is 4% and the marginal product of capital is Y/K.
C. output growth is 1% and the marginal product of labour is Y/(2N).
D. output growth is 2% and the marginal product of labour is (2Y)/N.
E. output growth is 1% and the marginal product of capital is (2Y)/K.

2. In a neoclassical model of output growth, assume that the savings rate is 0.2%,
output per person is 3, the population growth rate is 4%, the depreciation rate
is 2% and the current capital-labour ratio is 5. If the steady state level of output
per person is 12, what is the level of investment required to maintain the steady
state capital-labour ratio?
A. 1.2
B. 1.4
C. 2.4
D. 0.3
E. 6

3. In the neoclassical growth model, the vertical distance between output per
capita and savings per capita at the steady state is:
A. steady-state output per capita.
B. long-run output growth rate.
C. savings rate.
D. consumption per capita.
E. golden rule of savings.

4. In the neoclassical growth model, an increase in population growth will:

A. decrease the growth rate of total output in steady state.
B. pivot the production function down.
C. pivot the investment requirement line down.
D. increase the growth rate of total output in steady state.
E. increase long-run per capita income in steady-state.
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5. Using the diagram provided, which of the reasons listed below explain the
change of steady state from C to C’?

A. The savings rate has increased, causing the savings function to shift
upwards. At C, the new savings function is now less than the investment
requirement line. Capital per person decreases until the new steady state is
reached at point C’.
B. The savings rate has decreased, causing the savings function to shift
upwards. At C, the new savings function is less than the investment
requirement line. Capital per person decreases until the new steady state is
reached at point C’.
C. The savings rate has increased, causing the savings function to shift
upwards. At C, the investment requirement line is above the savings
function. Capital per person increases until the new steady state is reached
at point C’.
D. The savings rate has decreased, causing the savings function to shift
upwards. At C, the investment requirement line is below the savings
function. Capital per person decreases until the new steady state is reached
at point C’.
E. The savings rate has increased, causing the savings function to shift
upwards. At C, the new savings function is greater than the investment
requirement line. Capital per person increases until the new steady state is
reached at point C’.

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6. An empirical dissatisfaction with the neoclassical growth model developed
over the model’s prediction that:

A. the population grows faster for low-income countries.

B. corruption hinders long-run economic growth.
C. a constant marginal product of capital ensures that savings line and
required investment line eventually intersect.
D. the savings rate and economic growth are not correlated.
E. the savings rate is constant over time.

7. A production function that assumes constant marginal product of capital:

A. results in a concave savings function.
B. results in a linear savings function.
C. ensures that convergence in the long-run.
D. ensures a stable steady-state.
E. is essential to the neo-classical growth model.

8. Assume that a country's per-worker production is 𝑦 = 𝑘 0.5 where y is output per

worker and k is capital per worker. Assume a depreciation rate of 8 percent (=
0. 08) and a population growth rate of 0.02. If the saving rate (s) is 0.4, what is
capital per worker in the steady-state?
A. 4
B. 8
C. 16
D. 12
E. 2

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9. In the endogenous growth model, if the capital growth rate equals 6%, the
marginal product of capital and the savings rate are 200 and 0.03 respectively,
then the output growth rate will be:
A. 12%
B. 15%
C. 200%
D. 18%
E. 6%

10. Assume we have a simple endogenous growth model where technology is

labour-augmenting, that is, 𝑌 = 𝐹(𝐾, 𝐴𝑁), and where output per person is
proportional to the capital-labour ratio, such that 𝑦 = 𝑎𝑘. In this case, the
growth rate of output per capita can be expressed by:
A. 𝑠𝑎 + (𝑛 + 𝑑)
B. 𝑠𝑎 − (𝑛 + 𝑑)𝑘
C. 𝑠𝑎 + (𝑛 − 𝑑)𝑘
D. 𝑠𝑎 − (𝑛 + 𝑑)
E. 𝑠𝑘 − (𝑛 + 𝑑)𝑎

11. Suppose that output grows at 6.6% and that the share of labour in total income
is 0.8. If capital and labour grow at 3% and 5% respectively, what is the
contribution of total factor productivity to output growth?
A. 8%
B. 0.6%
C. 2%
D. 4%
E. 2.4%

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12. Assume an aggregate production function of the form 𝑌 = 𝑎𝐾, where 𝛥𝐾/𝐾 =
8%, 𝑎 = 0.2, A is a function of α (alpha), and 𝛥𝐴/𝐴 = 4%. Calculate the savings
rate.
A. 16%
B. 40%
C. 4%
D. 12%
E. 2%

13. Assume an endogenous growth model with labour augmenting technology. The
production function is 𝑌 = 𝐹(𝐾, 𝐴𝑁) with 𝐴 = 3(𝐾/𝑁), so 𝑦 = 3𝑘. If the
savings rate is 3% and there is neither population growth nor depreciation of
capital, what is the growth rate of output?
A. 0%
B. 1%
C. 9%
D. 3.3%
E. 2%

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Use the figure below to answer questions 14 and 15

14. Point A represents investment with ______________ marginal product and

point B represents investment with _______________ marginal product.

A. diminishing; constant
B. constant; diminishing
C. diminishing; increasing
D. constant; increasing
E. diminishing; diminishing

15. If an economy is to the right of A, per capita savings will be:

A. above the investment requirement line and the economy will move towards
B as more capital per capita is accumulated.
B. below the investment requirement line and the economy will move towards
B as more capital per capita is accumulated.
C. below the investment requirement line and the economy will move towards
A as there is insufficient savings to meet the investment required to maintain
a specific capital to labour ratio.
D. above the investment requirement line and the economy will move towards
A as there is insufficient savings to meet the investment required to maintain
a specific capital to labour ratio.
E. below the investment requirement line and the economy will move towards
B as there is insufficient savings to meet the investment required to maintain
a specific capital to labour ratio.

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Use the following diagram to answer questions 16 and 17

16. A poverty trap is represented by point _________ on the diagram which

represents a situation of ___________ population growth and ____________
steady state income.

A. A; high; low
B. A; low; high
C. B; high; low
D. C; high; low
E. C; low; high

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17. With reference to the diagram, which of the following statements are TRUE?

i. A and B are the only two stable equilibrium points.

ii. B is not a stable equilibrium point because the economy moves
away from B towards either A or C.
iii. Point B represents a poverty trap.
iv. Point C represents a situation of low population growth and high
income.

A. Only i and iii.

B. Only ii and iv.
C. Only iv.
D. Only iii.
E. Only i and iv.

18. For absolute convergence to occur, countries require:

A. equal growth rates in total output only.
B. equal rates of savings, technology, and population growth only.
C. equal rates of savings, technology, population growth and depreciation.
D. that the level of income per person equals the level of capital per person in
each country.
E. high rates of savings.

19. Empirical studies have shown that countries with higher levels of investment
tend to have better living standards. This finding is consistent with:
A. the endogenous growth model only.
B. both the neoclassical growth model and growth accounting theory.
C. both the neoclassical and the endogenous growth models.
D. neither the neoclassical nor the endogenous growth models.
E. the neoclassical growth model, but only in steady state.

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20. ________ and _______ are the main characteristics of “truly poor countries”
such as Ghana.
A. Low output; high corruption
B. High mortality rates; high corruption
C. High savings rates; a low population growth rate
D. Illicit capital outflows; black markets
E. Low savings rates; a high population growth rate

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