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Chapter 7—Economic Growth in the Global Economy

MULTIPLE CHOICE
1. Which economist is given credit for stating that "in the long run, we are all dead"?
a. Adam Smith
b. David Ricardo
c. John Maynard Keynes
d. Milton Friedman

ANS: C
PTS: 1
DIF: Easy
REF: p. 143
BLM: Knowledge

2. What do economists typically track to measure economic growth?

a. the unemployment rate
b. the expansion index
c. real GDP per capita
d. the employment rate

ANS: C
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

3. Which of the following best describes output per capita?

a. It is one measure of the marginal level of economic well-being in a country.
b. It is total output (GDP) divided by the labour force.
c. It is measured by GDP per capita.
d. It is total output (GDP) divided by the number of persons among who contributed to
production.

ANS: C
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

4. Which of the following statements about economic growth is the most accurate?
a. It is the annual percentage change in real GDP.
b. It is the annual percentage change in nominal GDP.
c. It is the annual percentage change in per capita real GDP.
d. It is the annual percentage change in disposable income.

ANS: C
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension
5. How is the prosperity of a nation typically measured today?
a. by its real output per capita
b. by its proportionate share of international trade
c. by its gold reserves
d. by its total output or gross national product

ANS: A
PTS: 1
DIF: Easy
REF: p. 144
BLM: Comprehension

6. What is the measure most commonly used by economists to gauge the standard of living of a nation?
a. capital investment
b. labour productivity
c. real GDP per capita
d. real GDP

ANS: C
PTS: 1
DIF: Easy
REF: p. 144
BLM: Comprehension

7. How does economic growth impact the output of goods and services in an economy and the quantity of
goods that citizens will have to consume?
a. It increases output resulting in less goods for consumption.
b. It decreases output resulting in less goods for consumption.
c. It decreases output resulting in more goods for consumption.
d. It increases output resulting in more goods for consumption.

ANS: D
PTS: 1
DIF: Easy
REF: p. 144
BLM: Comprehension

8. Which of the following is a measure of economic growth?

a. the marginal change in nominal output divided by total output from the previous year
b. the advancement in the quality of a nation's technology
c. the annual percentage change in per capita real output of goods and services
d. the rate of business investment and capital formation

ANS: C
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

7-2 Copyright © 2013 Nelson Education Limited

 9. Given a constant rate of growth of real GDP, what would cause a fall in real GDP per capita?
a. a decrease in the capital stock
b. an increase in the size of the labour force
c. a rate of population growth that is less than the rate of growth of real GDP
d. a rate of population growth that is greater than the rate of growth of real GDP

ANS: D
PTS: 1
DIF: Difficult
REF: p. 144
BLM: Comprehension

10. Given a constant rate of growth of real GDP, what would lead to an increasing real GDP per capita?
a. an increase in the size of the labour force
b. a rate of population growth that is greater than the rate of growth of real GDP
c. a rate of population growth that is less than the rate of growth of real GDP
d. an increase in the capital stock

ANS: C
PTS: 1
DIF: Difficult
REF: p. 144
BLM: Comprehension

11. What will cause the standard of living to decline?

a. if the rate of population growth is less than the rate of growth of real GDP
b. if the nominal GDP grows at a slower rate than real GDP
c. if the rate of population growth exceeds the rate of growth of real GDP
d. if the nominal GDP grows at a faster rate than real GDP

ANS: C
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

12. What will cause the standard of living to increase?

a. if the nominal GDP grows at a slower rate than real GDP
b. if the rate of population growth is less than the rate of growth of real GDP
c. if the rate of population growth exceeds the rate of growth of real GDP
d. if the nominal GDP grows at a faster rate than real GDP

ANS: B
PTS: 1
DIF: Difficult
REF: p. 144
BLM: Comprehension

Copyright © 2013 Nelson Education Limited 7-3

13. If real GDP is increasing more rapidly than the population, what can we conclude?
a. The economy must be experiencing inflation
b. Per capital real GDP will be decreasing.
c. Interest rates must be falling
d. Per capita real GDP will be increasing.

ANS: D
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

14. If real GDP per capita is decreasing, what can we conclude about real output?
a. It is growing more rapidly than the population.
b. It is growing less rapidly than the population.
c. It is growing more rapidly than are prices.
d. It is growing at the same rate as the population.

ANS: B
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

15. If real GDP per capita is increasing, what can we conclude about real output?
a. It is growing more rapidly than are prices.
b. It is growing more rapidly than the population.
c. It is growing less rapidly than the population.
d. It is growing at the same rate as the population.

ANS: B
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

16. What is the effect of an increase in the stock of capital on an economy’s production?
a. It causes an economy's production possibilities curve to shift inward over time.
b. It causes an economy's production possibilities curve to shift outward over time.
c. It has no effect on the position of an economy's production possibilities curve over time.
d. It causes a movement from a point on an economy's production possibilities curve to a
point inside the curve.

ANS: B
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

7-4 Copyright © 2013 Nelson Education Limited

17. Which of the following will cause an economy's production possibilities curve to shift outward over
time?
a. if the quality of resources decreases
b. if the productivity of labour decreases
c. if the stock of available capital decreases
d. if technological progress occurs

ANS: D
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

18. What is another term for how much a country's economy will produce at its potential output?
a. the trough of the business cycle
b. the trend line
c. a country’s economic welfare
d. the natural level of output

ANS: D
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

19. In which direction will improvements in and greater stocks of land, labour, capital, and entrepreneurial
activity shift the production possibilities curve?
a. Inward, such that the marketplace experiences a decrease in price and output levels.
b. Inward, because more resources will be used up and not renewed.
c. Outward, such that the cost of living rises.
d. Outward, such that more goods and services can be produced.

ANS: D
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

20. What is the best way to measure economics growth?

a. by the annual percentage change in nominal GDP
b. by the annual percentage change in nominal GDP per capita
c. by the annual percentage change in real GDP per capita
d. by the annual percentage change in real GDP

ANS: C
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Knowledge

Copyright © 2013 Nelson Education Limited 7-5

21. In any country, under which of the following circumstances will the population generally be better off?
a. if the quantity and quality of output decreases and the population does not increase faster
than real output
b. if the technology improves and the population increases faster than real output
c. if the quantity and quality of output increases and the population increases faster than real
output
d. if the quantity and quality of output increases and the population does not increase faster
than real output

ANS: D
PTS: 1
DIF: Difficult
REF: p. 144
BLM: Analysis

22. Which of the following will NOT cause the production possibilities curve to shift outward?
a. a very low birth rate
b. increased educational opportunities
c. increased entrepreneurial activity
d. improvements in the stock of land

ANS: A
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

23. Which of the following will cause the production possibilities curve to shift outward?
a. improved public education
b. increased regulation of the financial sector
c. reallocation of resources toward food production
d. decreased unemployment

ANS: A
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Knowledge

24. What should a nation do to achieve a high standard of living?

a. increase the tax deduction for child dependents
b. promote economic growth
c. use less capital and more labour in the production process
d. increase welfare payments to the poor

ANS: B
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

7-6 Copyright © 2013 Nelson Education Limited

25. What rule shows roughly how long it will take a nation to double its output at various growth rates?
a. the rule of 70
b. the rule of 1950
c. the rule of rapid growth
d. the duopoly rule

ANS: A
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

26. According to the rule of 70, if a nation grows at a rate of 10 percent per year, in roughly how many
years will national income double?
a. 5 years
b. 7 years
c. 10 years
d. 50 years

ANS: B
PTS: 1
DIF: Easy
REF: p. 144
BLM: Application

27. According to the rule of 70, if a nation grows at a rate of 1 percent per year, in roughly how many
years will national income double?
a. 7 years
b. 10 years
c. 70 years
d. 100 years

ANS: C
PTS: 1
DIF: Easy
REF: p. 144
BLM: Application

28. According to the rule of 70, if a nation grows at a rate of 7 percent per year, in roughly how many
years will national income double?
a. 5 years
b. 7 years
c. 10 years
d. 70 years

ANS: C
PTS: 1
DIF: Easy
REF: p. 144
BLM: Application

Copyright © 2013 Nelson Education Limited 7-7

29. According to the rule of 70, if a nation’s economy grows at a rate of 5 percent per year, in roughly how
many years will national income double?
a. 10 years
b. 14 years
c. 20 years
d. 70 years

ANS: B
PTS: 1
DIF: Easy
REF: p. 144
BLM: Application

30. According to the rule of 70, if a nation grows at a rate of 2 percent per year, in roughly how many
years will national income double?
a. 2 years
b. 7 years
c. 10 years
d. 35 years

ANS: D
PTS: 1
DIF: Easy
REF: p. 144
BLM: Application

31. According to the rule of 70, if a nation grows at a rate of 4 percent per year, in roughly how many
years will national income double?
a. 7 years
b. 10 years
c. 12.5 years
d. 17.5 years

ANS: D
PTS: 1
DIF: Easy
REF: p. 144
BLM: Application

32. What annual growth rate will result in a country roughly doubling its GDP in ten years?
a. 5 percent
b. 7 percent
c. 10 percent
d. 12 percent

ANS: B
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Application

7-8 Copyright © 2013 Nelson Education Limited

33. What annual growth rate will result in a country roughly doubling its GDP in five years?
a. 5 percent
b. 7 percent
c. 12 percent
d. 14 percent

ANS: D
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Application

34. What annual growth rate will result in a country roughly doubling its GDP in 20 years?
a. 2.5 percent
b. 3.5 percent
c. 7.5 percent
d. 12 percent

ANS: B
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Application

35. Country A and Country B initially have the same real GDP per capita. Country A experiences no
economic growth, while Country B grows at a sustained rate of 5 percent. In 14 years, how will
Country A's GDP compare to that of Country B’s?
a. It will be approximately one-fourth of Country B’s.
b. It will be approximately one-half of Country B’s.
c. It will be approximately double of Country B’s.
d. It will be approximately triple of Country B’s.

ANS: B
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Application

36. Country A and Country B initially have the same real GDP per capita. Country A experiences no
economic growth, while Country B grows at a sustained rate of 7 percent. In 12 years, how will
Country B's GDP compare to that of Country A’s?
a. It will be approximately one-fourth of Country A’s.
b. It will be approximately one-half of Country A’s.
c. It will be approximately double of Country A’s.
d. It will be approximately triple of Country A’s.

ANS: C
PTS: 1
DIF: Difficult
REF: p. 144
BLM: Application

Copyright © 2013 Nelson Education Limited 7-9

37. What is needed for a low-income country to develop into a high-income country?
a. high interest rates
b. sustained economic growth
c. high rates of inflation
d. restrictions on international trade

ANS: B
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

38. What is needed for a low-income country to develop into a high-income country?
a. tax breaks on consumption goods
b. continuous economic expansion
c. a sustained and rapid expansion in the money supply
d. deflation

ANS: B
PTS: 1
DIF: Moderate REF: p. 144
BLM: Comprehension

39. In the long run, what is the most important source of increase in a nation's standard of living?
a. high rate of consumption
b. zero rate of population growth
c. high rate of labour force growth
d. high rate of economic growth

ANS: D
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

40. What effect will better technology have on an economy’s production possibilities curve?
a. It will shift the curve outwards.
b. It will result in a movement along the curve.
c. It will shift the curve inwards.
d. It will not shift the curve.

ANS: A
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

7-10 Copyright © 2013 Nelson Education Limited

41. How is economic growth illustrated on a production possibilities diagram?
a. an inward shift of an economy's production possibilities curve
b. a movement from a point on an economy's production possibilities curve to a point inside
the curve
c. an outward shift of an economy's production possibilities curve
d. an upward slope on an economy's production possibilities curve

ANS: C
PTS: 1
DIF: Easy
REF: p. 144
BLM: Comprehension

42. How is a decrease in economic growth illustrated on a production possibilities diagram?

a. an inward shift of an economy's production possibilities curve
b. a slowing in the outward shift of an economy's production possibilities curve
c. an upward slope in an economy's production possibilities curve
d. a movement from a point inside an economy's production possibilities curve to a point on
the curve

ANS: B
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

43. Which of the following does NOT affect growth in real GDP per capita?
a. the total production of final goods in the economy
b. the distribution of income
c. the population
d. the production of final services in the economy

ANS: B
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

44. Which of the following is NOT associated with changes in the growth rate of real GDP per capita?
a. changes in the total production of final goods in the economy
b. changes in the size of the population
c. changes in the distribution of income
d. changes in the production of final services in the economy

ANS: C
PTS: 1
DIF: Moderate
REF: p. 144
BLM: Comprehension

Copyright © 2013 Nelson Education Limited 7-11

45. How is growth in a production possibilities curve diagram shown?
a. as an outward shift of the curve
b. as a movement along the curve to the southeast
c. as an inward shift of the curve
d. as a movement along the curve to the southwest

ANS: A
PTS: 1
DIF: Easy
REF: p. 144
BLM: Knowledge

46. In the long run, what is the most important determinant of a nation's standard of living?
a. its ability to export cheap labour
b. its rate of productivity growth
c. its ability to control the nation's money supply
d. its endowment of natural resources

ANS: B
PTS: 1
DIF: Moderate
REF: p. 146
BLM: Comprehension

47. What does the extent to which the economy can produce at its natural rate of output NOT depend
upon?
a. the number of consumers
b. the productivity of labour
c. the stock of available capital
d. technology

ANS: A
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Knowledge

48. Which of the following is NOT likely to affect the rate of economic growth?
a. technological change
b. the level of government spending
c. the quantity of available resources
d. the quality of available resources

ANS: B
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Knowledge

7-12 Copyright © 2013 Nelson Education Limited

49. Which of the following did NOT result in economic growth?
a. the instillation of a network of irrigation ditches and pumping stations in order to grow
fruits and vegetables in parts of Southern Ontario
b. the emigration of many citizens from Zimbabwe when a politically repressive regime took
office
c. the increase in government funding of post-secondary education
d. Cyrus McCormack inventing a threshing machine for harvesting grains

ANS: B
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Analysis

50. Which of the following factors will NOT contribute to economic growth?
a. technological advances
b. an increase in minimum wage
c. growth in physical capital
d. an increase in the productivity of labour

ANS: B
PTS: 1
DIF: Easy
REF: p. 147
BLM: Comprehension

51. Which of the following factors contributes to economic growth?

a. an increase in the minimum wage
b. a decrease in the productivity of labour while holding the productivity of capital fixed
c. the discovery of new oil reserves
d. a decrease in the quantity of labour due to emigration

ANS: C
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Comprehension

52. Which of the following factors contributes to economic growth?

a. an increase in the proportion of the population that is college educated
b. a decrease in the productivity of labour
c. an increase in the average wage rate paid to workers
d. an increase in the standard of living

ANS: A
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Knowledge

Copyright © 2013 Nelson Education Limited 7-13

53. Which of the following statements best illustrates economic growth?
a. An increase in the quantity of labour always leads to economic growth.
b. Increased education adds to the stock of human capital, not unlike building factories adds
to the stock of physical capital.
c. A decrease in the productivity of labour leads to economic growth.
d. An increase in the minimum wage will always lead to economic growth.

ANS: B
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Analysis

54. Which of the following countries has a relative abundance of natural resources?
a. Somalia
b. Canada
c. Hong Kong
d. Japan

ANS: B
PTS: 1
DIF: Easy
REF: p. 147
BLM: Knowledge

55. Which of the following countries does NOT have an abundance of natural resources?
a. Japan
b. Australia
c. United States
d. Brazil

ANS: A
PTS: 1
DIF: Easy
REF: p. 147
BLM: Knowledge

56. Which of the following government policies is NOT likely to encourage per capita economic growth?
a. special subsidies for capital-intensive forms of production
b. promotion of education and training programs for workers
c. high taxes on companies that spend a lot on capital formation
d. the use of tax revenues for investment and capital formation

ANS: C
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Comprehension

7-14 Copyright © 2013 Nelson Education Limited

57. What, if any, do most modern economists believe is the single most important factor that can be used
to explain economic growth?
a. Nearly all economists agree that there is more than a single factor, but that capital
formation is the most important factor.
b. Nearly all economists believe that extensive private property rights are the most important
factor.
c. Nearly all economists believe that economic growth is a complex process without a single
dominant factor.
d. Nearly all economists agree that abundant resources are the most important factor.

ANS: C
PTS: 1
DIF: Difficult
REF: p. 147
BLM: Knowledge

58. Which of the following is NOT considered a factor that contributes to economic growth?
a. growth in the quantity and quality of labour resources used
b. growth in physical capital inputs (machines, tools, buildings, and inventories)
c. growth in the money supply that exceeds the growth of final goods and services
d. government protection of property rights

ANS: C
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Comprehension

59. Which of the following is generally NOT considered a factor that contributes to economic growth?
a. technological advances
b. increased labour
c. the migration of resources from areas of low productivity to areas of high productivity
d. increased labour productivity

ANS: B
PTS: 1
DIF: Easy
REF: p. 147
BLM: Comprehension

60. Which of the following is NOT considered to be a significant factor contributing to economic growth?
a. a less intense work effort in the heat of the tropics
b. an increase in the quantity of physical capital
c. a greater division of labour and specialization
d. an increase in use of land inputs

ANS: A
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Comprehension

Copyright © 2013 Nelson Education Limited 7-15

61. Which of the following is NOT considered a factor that contributes to economic growth?
a. government regulation of key industries
b. improved efficiencies through economies of scale
c. government protection of property rights
d. increased specialization of labour

ANS: A
PTS: 1
DIF: Moderate
REF: p. 147
BLM: Comprehension

62. Which of the following will NOT directly affect the size of a nation's capital stock?
a. resources reallocated to the production of food
b. a new machine installed in a company's plant
c. a newly constructed factory
d. an eighteen-year-old student enrolled in university as a full-time student

ANS: A
PTS: 1
DIF: Easy
REF: p. 147 | p. 148
BLM: Comprehension

63. Which of the following is most likely to contribute to economic growth as measured by real GDP per
capita?
a. the imposition of tariffs and quotas on imported goods
b. rapid population growth
c. an increase in marginal tax rates
d. increased capital formation

ANS: D
PTS: 1
DIF: Moderate
REF: p. 148
BLM: Knowledge

64. What correlates with a faster rate of technological progress?

a. a slower rate of growth of the money supply
b. a greater rate of economic growth
c. a slower rate of economic growth
d. a greater rate of population growth

ANS: B
PTS: 1
DIF: Easy
REF: p. 148
BLM: Comprehension

7-16 Copyright © 2013 Nelson Education Limited

65. What correlates with a slower rate of capital formation?
a. a slower rate of economic growth
b. a greater rate of population growth
c. a slower rate of growth of the money supply
d. a greater rate of economic growth

ANS: A
PTS: 1
DIF: Easy
REF: p. 148
BLM: Comprehension

66. What will better technology enable producers to do?

a. economize on the use of resources
b. reallocate resources toward the production of capital
c. increase wages for low skilled workers
d. rely less on entrepreneurs

ANS: A
PTS: 1
DIF: Easy
REF: p. 148
BLM: Knowledge

67. Which of the following is one of the most important determinants of economic growth?
a. the birth rate
b. the savings rate
c. the unemployment rate
d. the rate of infant mortality

ANS: B
PTS: 1
DIF: Easy
REF: p. 149
BLM: Knowledge

68. Will increased investment alone guarantee economic growth?

a. No, because economic growth hinges on the quality and type of investment as well as the
human capital and improvements in technology.
b. No, because an economy must rely on capital injections from abroad.
c. Yes, because money is the only resource needed for growth.
d. Yes, because growth occurs only with savings.

ANS: A
PTS: 1
DIF: Moderate
REF: p. 149
BLM: Analysis

Copyright © 2013 Nelson Education Limited 7-17

69. Is it possible to have economic growth with no opportunity cost?
a. No, because growth depletes the stock of knowledge so that more growth today means less
growth tomorrow.
b. No, but economic growth is always worth whatever sacrifice is required.
c. No, because growth requires the sacrifice of consumption goods in order to invest in
capital formation and research and development.
d. Yes, economic growth requires no current sacrifices, only the passage of time.

ANS: C
PTS: 1
DIF: Difficult
REF: p. 149
BLM: Analysis

70. Which of the following is likely to occur as a result of falling incomes?

a. Reduced incomes will lead to reduced savings and, as a result, a reduction in capital
formation.
b. Reduced incomes will lead to a decrease in spending on consumption but an increased
spending on research and development.
c. Reduced incomes will result in a decrease in the availability of labour inputs for
production.
d. Reduced incomes will lead to increased savings and, as a result, an increase in capital
formation.

ANS: A
PTS: 1
DIF: Moderate
REF: p. 149
BLM: Comprehension

71. In a consumer-oriented economy, what can we conclude about the decision to save in order to promote
economic growth?
a. It must be enforced by high levels of taxation.
b. It means a sacrifice of current consumption in order to enhance future consumption.
c. It cannot be expected to benefit future generations.
d. It can be expected to cause widespread unemployment.

ANS: B
PTS: 1
DIF: Moderate
REF: p. 149
BLM: Comprehension

72. In a fully employed economy, which of the following best describes invention and discovery?
a. They are achieved through sacrifices in current consumption.
b. They have negative opportunity costs.
c. They cannot be achieved without further economic growth.
d. They are automatic.

ANS: A
PTS: 1
DIF: Moderate
REF: p. 149
BLM: Comprehension

7-18 Copyright © 2013 Nelson Education Limited

73. Which of the following does NOT describe an investment in human capital?
a. It is of minor importance to economic growth.
b. It can be acquired through on-the-job training.
c. It can be acquired through education.
d. It is an important source of economic growth.

ANS: A
PTS: 1
DIF: Easy
REF: p. 149
BLM: Knowledge

74. Other things being equal, what is the impact of a higher rate of savings across countries?
a. a lower rate of change of real GDP per capita
b. a higher rate of change of real GDP per capita
c. a lower rate of investment
d. a lower productivity of labour

ANS: B
PTS: 1
DIF: Moderate
REF: p. 149
BLM: Comprehension

75. Which of the following will NOT increase the rate of growth in an economy?
a. an increase in labour productivity
b. technological progress
c. higher rates of investment
d. a reduction in the rate of savings

ANS: D
PTS: 1
DIF: Moderate
REF: p. 149
BLM: Knowledge

76. Many scholars believe that the importance of research and development is understated. Which of the
following is included in research and development efforts?
a. improvements to management
b. foreign trade
c. increased use of unemployed resources
d. reallocation of resources among different products

ANS: A
PTS: 1
DIF: Moderate
REF: p. 150
BLM: Knowledge

Copyright © 2013 Nelson Education Limited 7-19

77. Sergei has developed a new fat substitute that has no calories and produces no side effects. What kind
of support from the government is he most likely to want, in order to bring this innovation to the
marketplace?
a. a trademark
b. a patent
c. an education subsidy
d. a marketing subsidy

ANS: B
PTS: 1
DIF: Moderate
REF: p. 150
BLM: Comprehension

78. In a country that does not protect patents, what impact would you expect to see on the amount of
research and development?
a. There would be more, because companies are civic-minded and highly motivated to
introduce innovations that improve the standard of living.
b. There would be less, because the benefits to society of engaging in research and
development would be less than the costs to society.
c. There would be less, because if they made a significant investment in the development,
they would be unable to protect the innovations or discoveries long enough to be
sufficiently compensated for their efforts.
d. There would be more, because they could still hope to monopolize the market.

ANS: C
PTS: 1
DIF: Moderate
REF: p. 150
BLM: Analysis

79. Which of the following can help a nation achieve higher economic growth?
a. more resources allocated to consumption goods
b. taxes imposed on investment in capital
c. increased wages in the service sector
d. more resources devoted to research and development

ANS: D
PTS: 1
DIF: Moderate
REF: p. 150
BLM: Comprehension

80. In countries with low levels of income, which of the following is NOT likely?
a. The opportunity cost of an education is higher than in high-income countries.
b. Illiteracy rates are higher than in high-income countries.
c. Economies are primarily agriculture based.
d. Property rights are well defined and enforced.

ANS: D
PTS: 1
DIF: Moderate
REF: p. 151
BLM: Comprehension

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81. During the Klondike gold rush, the first prospectors created "miners' laws," which described how gold
claims could be staked and how these claims would be enforced. What factor that affects economic
growth was recognized by the prospectors who created the "miners' laws"?
a. the importance of natural resources
b. the need for government intervention
c. well-defined and enforced property rights
d. technological advance

ANS: C
PTS: 1
DIF: Easy
REF: p. 151
BLM: Analysis

82. In a country that has an unstable government or judiciary, what impact would you expect to see on the
amount of entrepreneurial activity?
a. There would be less entrepreneurial activity, because there would be an unreliable
infrastructure for protecting property rights.
b. There would be more entrepreneurial activity, because in general there would be less
taxation of commercial and research activities.
c. There would be less entrepreneurial activity, because in an unstable economy there are
fewer entrepreneurs.
d. There would be more entrepreneurial activity, because there would be fewer governmental
restrictions.

ANS: A
PTS: 1
DIF: Moderate
REF: p. 151
BLM: Analysis

83. Which of the following will NOT contribute to increasing the stock of capital of a nation?
a. a lack of enforcement of private property rights
b. an increase in savings
c. a reduction in taxes on capital gains and stock dividends
d. the subsidization of higher education

ANS: A
PTS: 1
DIF: Moderate
REF: p. 151
BLM: Comprehension

Copyright © 2013 Nelson Education Limited 7-21

84. Which of the following is the most likely explanation for the continued poverty in many developing
countries?
a. There is political stability.
b. There is an absence of or prohibition on birth control.
c. There is a lack of defined and enforceable property rights.
d. There is a general lack of natural resources.

ANS: C
PTS: 1
DIF: Moderate
REF: p. 151
BLM: Knowledge

85. Which of the following best describes the relationship between economic growth and literacy?
a. Increased literacy initially stimulates economic growth by raising labour productivity, but
as the economy grows and the opportunity cost of education rises, literacy declines.
b. Economic growth and literacy are independent variables and tend not to move together.
c. Increased literacy stimulates economic growth by raising labour productivity, and as the
economy grows, people consume more education.
d. As the economy grows, the literacy rate declines because of the low opportunity cost.

ANS: C
PTS: 1
DIF: Moderate
REF: p. 152
BLM: Knowledge

86. When observing economic growth and literacy rates, which of the following does NOT describe the
relationship between the two?
a. Increases in worker productivity lead to higher levels of education.
b. Higher literacy rates cause economic growth.
c. Economic growth may be a consequence of improved education.
d. Economic growth causes higher literacy rates.

ANS: A
PTS: 1
DIF: Difficult
REF: p. 152
BLM: Comprehension

87. Which of the following exists when an economy experiences significant economic growth?
a. No observed relationship exists between output per capita and adult literacy rates.
b. A direct relationship exists between output per capita and adult literacy rates.
c. An indirect relationship exists between output per capita and adult literacy rates.
d. A negative relationship exists between output per capita and adult literacy rates.

ANS: B
PTS: 1
DIF: Moderate
REF: p. 152
BLM: Comprehension

7-22 Copyright © 2013 Nelson Education Limited

88. Which of the following is NOT considered to be an improvement in human capital?
a. an increase in education
b. more creativity and innovation
c. an increase in the amount of labour
d. higher literacy rates

ANS: B
PTS: 1
DIF: Easy
REF: p. 152
BLM: Comprehension

89. Which of the following best describes the relationship between economic growth and reduced levels of
illiteracy?
a. Reduced levels of illiteracy are, in part, a cause of economic growth.
b. Reduced levels of illiteracy are, in part, caused by economic growth.
c. Reduced levels of illiteracy are largely unrelated to economic growth.
d. Reduced levels of illiteracy are, in part, both a cause of economic growth and caused by
economic growth.

ANS: D
PTS: 1
DIF: Moderate
REF: p. 152
BLM: Analysis

90. Which of the following was NOT one of Malthus’s assumptions?

a. The economy was agricultural in nature.
b. The supply of land was fixed.
c. Human sexual desire worked to increase population.
d. Technology would increase with population.

ANS: D
PTS: 1
DIF: Easy
REF: p. 154
BLM: Knowledge

91. What did Malthus base his predictions regarding the decline in per capita economic growth on?
a. the law of diminishing marginal returns
b. scarce resources
c. the law of demand
d. decreasing returns to scale

ANS: A
PTS: 1
DIF: Easy
REF: p. 155
BLM: Knowledge

Copyright © 2013 Nelson Education Limited 7-23

 92. Why did Malthus’s predictions NOT come to fruition for most of the developed world?
a. Death due to natural disasters slowed the population growth.
b. The law of diminishing returns only applies in theory, not in practice.
c. He implicitly neglected the potential effect of technological advancement.
d. His predictions were only intended to apply to African nations.

ANS: C
PTS: 1
DIF: Moderate
REF: p. 155
BLM: Knowledge

93. Why does agricultural output tend to increase along with population, in contrast to Malthus’s
predictions?
a. Specialization and division of labour tend to increase agricultural output enough.
b. Irrigation, fertilizers, and conservation techniques increase the amount of arable land.
c. In the long run, land is not a fixed resource.
d. The law of diminishing returns only applies in theory, not in practice.

ANS: B
PTS: 1
DIF: Moderate
REF: p. 155
BLM: Comprehension

TRUE/FALSE
1. Increases in the quality and quantity of an economy's resources have little effect on its potential output
in the long run.

ANS: F
PTS: 1
REF: p. 144

2. If the educational attainment of a nation's population increases, the economy's production possibilities
curve shifts inward.

ANS: F
PTS: 1
REF: p. 144

3. Economists generally define economic growth as an increase in the nominal income of the population.

ANS: F
PTS: 1
REF: p. 144

4. Economists generally define economic growth as an increase in real income per capita.

ANS: T
PTS: 1
REF: p. 144

7-24 Copyright © 2013 Nelson Education Limited

 5. It is impossible to have economic growth unless a country or a region has abundant natural resources
to sustain the growth.

ANS: F
PTS: 1
REF: p. 144

6. A nation's prosperity is sometimes measured in terms of real GDP per capita.

ANS: T
PTS: 1
REF: p. 145

7. An increase in the quantity of labour inputs always leads to economic growth.

ANS: F
PTS: 1
REF: p. 147

8. Brazil has a relatively low income per capita because it has relatively few natural resources.

ANS: F
PTS: 1
REF: p. 147

9. Hong Kong and Japan have achieved relatively high incomes per capita despite lacking an abundance
of natural resources.

ANS: T
PTS: 1
REF: p. 147

10. As savings grow in an economy, economic growth rises.

ANS: T
PTS: 1
REF: p. 148

11. A technological advance may come in either the form of a product or a process innovation.

ANS: T
PTS: 1
REF: p. 148

12. Foreign direct investment (capital injections from abroad) can also promote economic growth.

ANS: T
PTS: 1
REF: p. 149

Copyright © 2013 Nelson Education Limited 7-25

13. Government can play an essential, even crucial, role in economic growth by enforcing property rights.

ANS: T
PTS: 1
REF: p. 151

14. Free trade can promote greater output because of the principle of comparative advantage.

ANS: T
PTS: 1
REF: p. 152

15. As economic growth rises, literacy rates tend to fall.

ANS: F
PTS: 1
REF: p. 153

16. The higher opportunity cost of obtaining an education in developing countries is one of the reasons
that school enrollments are lower.

ANS: T
PTS: 1
REF: p. 153

17. In developing countries, the opportunity cost of an education is relatively low compared to the cost in
a highly developed country.

ANS: F
PTS: 1
REF: p. 153

18. If Latvia's output increases by 1 percent while its population rises by 3 percent, Latvia's per capita
output will rise.

ANS: F
PTS: 1
REF: p. 154

19. If Denmark's output increases by 6 percent while its population rises by 2 percent, Denmark's per
capita output will rise.

ANS: T
PTS: 1
REF: p. 154

20. Economies of large-scale production may exist in some forms of production, so larger markets
associated with greater populations can lead to more efficiently sized production units.

ANS: T
PTS: 1
REF: p. 154

7-26 Copyright © 2013 Nelson Education Limited

ESSAY
1. The Canada Education Savings Grant (CESG) is a federal government grant designed to encourage
post-secondary education. Using a production possibilities curve, demonstrate how the CESG might
affect economic growth and explain your answer.

ANS:
Implementation of the CESG shifted Canada’s production possibilities curve in an outward direction.
The availability of educational subsidies helped students attain higher levels of education, thereby
adding to the nation's stock of human capital and improving the productivity of labour.
PTS: 1

2. How can increased investment help a country achieve increased economic growth? What are the costs
involved?

ANS:
Countries can profit from investment in much the same way that firms do. A country that invests
substantially in human and physical capital will be able to produce a greater quantity of goods and
services in future periods, experiencing a higher standard of living as a result. Countries that tend to
grow most rapidly are those that devote a larger share of available resources to producing capital
goods instead of consumption goods.
PTS: 1

3. What is the relationship between savings, capital formation, and consumption?

ANS:
One of the most important determinants of economic growth is the savings rate. If individuals wish to
consume more in the future, they must consume less than their total income today. The savings from
individuals become available to businesses that in turn use it for investment purposes in plant,
equipment, and the expansion or start-up of businesses.
PTS: 1

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