Foundations of Macroeconomics 5th Edition Bade Test Bank

Foundations of Macroeconomics 5th
Edition Bade Test Bank

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Foundations of Macroeconomics, 5e (Bade/Perkin)
Chapter 9 Economic Growth
9.1 The Basics of Economic Growth
1) Economic growth is defined as

A) a decrease in the rate of inflation.
B) an increase in employment.
C) a sustained expansion of production possibilities.
D) an increase in the wage rate.
E) an increase in the nation's population.
Answer: C
Topic: Economic growth
Skill: Level 1: Definition
Section: Checkpoint 9.1
Status: WM
AACSB: Reflective thinking
2) Economic growth is a sustained expansion of production possibilities, as measured by the

increase in ________ over time.
A) real GDP
B) population
C) inflation
D) the price level
E) employment
Answer: A
Status: CT
3) A country will likely experience an increase in poverty if

A) its population decreases over time.
B) its real GDP growth rate decreases or slows over time.
C) its inflation rate decreases or slows over time.
D) its real GDP per person growth rate increases over time.
E) it does not receive foreign aid.
Answer: B
Skill: Level 2: Using definitions
Status: NU
1
Copyright © 2011 Pearson Education, Inc.
4) Economic growth is defined as equal to the increase in
A) employment.
B) population.
C) real GDP.
D) the price level.
E) the inflation rate.
Answer: C
Status: AA
5) Which of the following variables is used to determine a country's economic growth?

i) real GDP
ii) wages
iii) inflation
A) i and ii only.
B) i, ii and iii.
C) ii and iii.
D) i only.
E) i and iii.
Answer: D
Status: CD new
6) The growth rate of real GDP is measured by the following formula:

A) real GDP in the current year minus real GDP in the previous year.
B) real GDP in the previous year minus real GDP in the current year.
 real GDP in the current year - real GDP in the previous year 
C)   × 100.
 real GDP in the previous year 
D) (real GDP in the current year + real GDP in the previous year) ÷ 2.
E) (real GDP in the current year minus real GDP in the previous year) × 100.
Answer: C
Topic: Calculating growth rates
Status: AA
AACSB: Analytical reasoning
2
7) The growth rate of real GDP equals
A) [(employment in the current year - employment in previous year)/employment in previous
year] × 100.
B) [(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.
C) [(real GDP in previous year - real GDP in current year) ÷ real GDP in previous year] × 100.
D) [(real GDP in current year - real GDP in previous year) ÷ real GDP in current year] × 100.
E) (real GDP in current year - real GDP in previous year) × 100.
Answer: B
Status: DMC
8) If real GDP was $14 trillion last year and is $16 trillion this year, what is the growth rate?
A) 12.5 percent
B) -12.5 percent
C) 14 percent
D) $2 trillion
E) 47 percent
Answer: C
Status: CD new
9) Suppose France's real GDP grew from $750 billion in 2008 to $821 billion in 2009. What was
the growth rate of France's real GDP?
A) 10 percent
B) 9.5 percent
C) 9.1 percent
D) 8.6 percent
E) $71 billion
Answer: B
Topic: Growth rate
Status: CD new
3
10) If U.S. real GDP in 2007 was $13.25 trillion and U.S. real GDP in 2008 was $13.31 trillion,
what was the economic growth rate of the United States during this period?
A) 18 percent
B) -1.36 percent
C) 1.36 percent
D) 6.9 percent
E) $1.8 trillion
Answer: C
Status: CD new
11) If real GDP in year 1 is $72 million and real GDP in year 2 is $87 million, then the growth
rate of real GDP is
A) 15 percent.
B) $15 million.
C) 20.8 percent.
D) 17 percent.
E) 83 percent.
Answer: C
Status: CD new
12) In 2008, real GDP in the United States was $13,312 billion. In 2009, real GDP in the United
States was $13,112 billion. What was the U.S. economic growth rate from 2008 to 2009?
A) -1.5 percent
B) 1.5 percent
C) 0.98 percent
D) 0.12 percent
E) $200 million
Answer: A
Topic: Growth rate
Status: CD new
4
13) Using the data in the table above, the growth rate of real GDP for 2008 is equal to
A) 9.09 percent.
B) 7.00 percent.
C) 5.00 percent.
D) 4.76 percent.
E) 10.0 percent.
Answer: B
Status: CD new
14) Using the data in the table above, real GDP per person in 2007 is
A) $70,000.
B) $71,429.
C) $75,000.
D) $70 trillion.
E) 7 percent.
Answer: A
Status: CD new
15) Using the data in the table above, the growth rate of real GDP has
A) increased from year to year.
B) increased more rapidly from year to year.
C) remained constant from year to year.
D) slowed from year to year.
E) probably changed, but more information is needed about the price level to determine by how
much it has changed.
Answer: A
Skill: Level 3: Using models
Status: CD new
5
16) Suppose India wants to measure how much the standard of living has changed over the last
decade. Which piece of data should India use?
A) population.
B) real GDP per person.
C) real GDP.
D) wages.
E) inflation.
Answer: B
Topic: Standard of living
Status: CD new
17) To measure the change in the standard of living, it is best to use the growth rate
A) from the Rule of 70.
B) of real GDP.
C) of the population.
D) of real GDP per person.
E) of the price level.
Answer: D
Status: NU
18) In growth theory, the change in a country's standard of living is measured by the change in
A) real GDP per person.
B) real GDP.
C) the nation's capital stock.
D) wages per person.
E) employment.
Answer: A
Status: WM
6
19) A measure of growth in the standard of living is the growth in
A) real GDP.
B) population.
C) real GDP minus the growth in population.
D) population minus the growth in real GDP.
E) employment.
Answer: C
Status: WM
20) Growth in the standard of living is measured by the increase in

A) real GDP.
B) the Rule of 70.
C) employment.
D) real GDP per person.
E) consumption.
Answer: D
Status: AA
21) The growth rate of real GDP per person equals the
A) population growth rate plus the growth rate of real GDP.
B) change in the economic growth rate divided by the change in the population growth rate.
C) the economic growth rate per person divided by the change in the population growth rate.
D) growth rate of real GDP minus the growth rate of the population.
E) population growth rate plus the growth rate of real GDP then divided by the initial level of
real GDP.
Answer: D
Topic: Growth rate, real GDP per person
Status: AA
7
22) If real GDP grows at a faster rate than does population, then the standard of living, as
measured by real GDP per person,
A) improves.
B) worsens.
C) remains the same.
D) cannot be measured.
E) either improves, worsens, or stays the same, depending on the size of the population and the
actual level of real GDP.
Answer: A
Status: CD new
23) The population in the current year is 31.5 million and the real GDP is $814 million. The
previous year's statistics were a population of 31 million and a real GDP of $800 million. The
change in the standard of living, measured by growth in real GDP per person, is
A) 1.6 percent.
B) 7.75 percent.
C) 4.3 percent.
D) 6 percent.
E) 0 percent.
Answer: C
Status: CD new
24) Assume the population growth rate is 2 percent and the real GDP growth rate is 5 percent.
The change in standard of living, as measured by the growth rate in real GDP per person, is
A) 7 percent.
B) 2.5 percent.
C) 5 percent.
D) 3 percent.
E) -3 percent.
Answer: D
Status: WM
8
25) Real GDP in the country of Oz is growing at 5 percent and its population is growing at 2
percent. In the country of Lilliput, real GDP is growing at 4 percent and its population is growing
at 0.5 percent. Thus,
A) real GDP per person in Oz is growing at a faster rate than in Lilliput.
B) real GDP per person in Lilliput is growing at a faster rate than in Oz.
C) real GDP per person in Lilliput is growing at the same rate as in Oz.
D) real GDP per person in Lilliput is growing at a rate that is not comparable to that in Oz.
E) we need more information to determine if real GDP per person in Lilliput is growing faster or
slower than real GDP per person in Oz.
Answer: B
Status: DMC
26) If the U.S. population grew at a 0.9 percent during 2006 and real GDP grew at a 4.4 percent
during the same period, what was the growth rate of real GDP per person?
A) 3.5 percent
B) 5.3 percent
C) 4.0 percent
D) -3.5 percent
E) 4.4 percent
Answer: A
Status: DMC
27) If real GDP grows at a rate of 6 percent and population grows at a rate of 2 percent, then real
GDP per person grows at a rate of
A) 4 percent.
B) 2 percent.
C) 0.5 percent.
D) -3 percent.
E) 8 percent.
Answer: A
Status: NU
9
28) Iceland's real GDP grows at a rate of 2.6 percent and population grows at a rate of 0.8
percent. Iceland's real GDP per person grows at a rate of
A) 1.8 percent.
B) 2.6 percent.
C) 3.4 percent.
D) 3.0 percent.
E) 3.2 percent.
Answer: A
Status: MR
29) If an economy's growth rate of real GDP is 3 percent per year and the growth rate of the
population is 2.5 percent per year, the growth rate of real GDP per person is
A) 3 + 2.5 = 5.5 percent per year.
B) [(3 - 2.5) ÷ 2.5] × 100 = 20 percent per year.
C) [(2.5 - 3) ÷ 3] × 100 = 16.6 percent per year.
D) 3 - 2.5 = 0.5 percent per year.
E) 2.5 - 3 = -0.5 percent per year.
Answer: D
Status: TPS
30) In 2009, U.S. real GDP decreased by 3 percent and the population grew by 1 percent. Thus,
real GDP per person
A) increased 2 percent.
B) decreased 2 percent.
C) increased 4 percent.
D) decreased 4 percent.
E) decreased 3 percent.
Answer: D
Status: AA
10
31) If a country experiences a real GDP growth rate of 1 percent and population growth of 2
percent, then the growth rate of real GDP per person is
A) 3 percent.
B) 2 percent.
C) 1 percent.
D) -1 percent.
E) 0 percent.
Answer: D
Status: CT
32) During 2008, Swaziland had a real GDP growth rate of 1.8 percent and a real GDP growth
rate per person of -1.3 percent. These rates indicate that in Swaziland
A) there was an error when calculating the growth rates because the growth rate of real GDP per
person cannot be negative.
B) the population growth rate was negative.
C) the population grew at a faster rate than real GDP.
D) poverty levels are declining.
E) real GDP grew more rapidly than did the population.
Answer: C
Skill: Level 5: Critical thinking
Status: CT
33) In India last year, the growth rate of real GDP was 3.5 percent and the population grew from
1,000 million people to 1,100 million. Real GDP per person
A) increased by 13.5 percent.
B) decreased by 6.5 percent.
C) increased by 6.5 percent.
D) decreased by 13.5 percent.
E) increased by 3.5 percent.
Answer: B
Status: AA
11
34) Belgium's real GDP per person is $33,000 and Austria's is $34,700. The population growth
rate in Belgium is 0.13 percent and the growth rate of real GDP is 3.0 percent. The population
growth rate in Austria is 0.08 percent and the growth rate of real GDP is 3.3 percent. If these
growth rates continue, how many years will it take for Belgium's real GDP per person to equal
Austria's real GDP per person?
A) Belgium's standard of living will never equal Austria's.
B) Just over 23 years
C) Just over 24 years
D) Just over 21 years
E) Over 230 years
Answer: A
Status: RS
35) If Country A's real GDP is growing at 6 percent per year and Country B's real GDP is
growing at 6 percent per year, then the standard of living is
A) growing more rapidly in Country A.
B) higher in Country B.
C) changing at the same rate in Country A and Country B.
D) growing more slowly in Country A.
E) changing at the same rate in Country A and Country B only if the rate of population growth is
the same in both countries.
Answer: E
Status: NU
36) If Country A's real GDP per person is growing at 6 percent and Country B's real GDP per
person is growing at 3 percent, then
A) the standard of living is higher in Country A.
B) the standard of living is higher in Country B.
C) the standard of living is growing more rapidly in Country A.
D) we cannot say whose standard of living is growing more rapidly without knowing the
population growth rate.
E) we cannot say whose standard of living is growing more rapidly without knowing the growth
rate of real GDP.
Answer: C
Status: NU
12
37) According to the data in the table above,
A) the standard of living improved between year 1 and year 2.
B) the standard of living worsened between year 1 and year 2.
C) as measured by real GDP per person, the standard of living remained the same between year 1
and year 2.
D) real GDP grew more rapidly than population between year 1 and year 2.
E) real GDP grew more slowly than population between year 1 and year 2.
Answer: C
Status: NU
38) According to the data in the table above, real GDP grew at a rate of ________ between year
1 and year 2.
A) 10 percent
B) 1 percent
C) 50 percent
D) 5 percent
E) 55 percent
Answer: A
Status: NU
39) According to the data in the table above, real GDP per person grew at a rate of ________
between year 1 and year 2.
A) 10 percent
B) 0 percent
C) 1 percent
D) 5 percent
E) 50 percent
Answer: B
Status: NU
13
40) The rule of ________ can be used to calculate the number of years that it takes for the level
of a variable to ________.
A) 20; double
B) 70; triple
C) 70; double
D) 20; triple
E) thumb; double
Answer: C
Topic: Rule of 70
Status: AA
41) The Rule of 70 states that the level of a variable will double in
A) 70 years.
B) the number of years equal to the variable's annual rate of growth divided by 70.
C) the number of years equal to 70 divided by the variable's annual growth rate.
D) the number of years equal to the variable's annual growth rate minus 70.
E) the number of years equal to 70 multiplied by the variable's annual growth rate expressed as a
decimal.
Answer: C
Topic: Rule of 70
Status: WM
42) The Rule of 70, as applied to real GDP growth, can be used to find the
A) real GDP growth rate necessary to double growth.
B) number of years it takes for the level of real GDP to double.
C) growth rate of real GDP.
D) number of years it takes for the growth rate of real GDP to double.
E) population growth rate necessary to double the GDP growth rate.
Answer: B
Topic: Rule of 70
Status: CT
14
43) The Rule of 70 can be used to calculate the
A) economic growth rate per month.
B) population growth rate per year.
C) number of years it would take for the level of any variable to double.
D) 70 percent level of the economic growth rate.
E) economic growth rate per year.
Answer: C
Topic: Rule of 70
Status: AA
44) Approximately how long will it take Ethiopia to double its real GDP per person of $100 if its
growth rate of real GDP per person is 0.9 percent?
A) 63 years
B) 77.7 years
C) 70 years
D) 109 years
E) 100 years.
Answer: B
Topic: Rule of 70
Status: DMC
45) If Country A's real GDP grows at a rate of 14 percent per year, about how many years will it
take for Country A's real GDP to double?
A) 10
B) 7
C) 5
D) 30
E) 14
Answer: C
Topic: Rule of 70
Status: NU
15
46) According to the Rule of 70, if a country grows at 2.0 percent per year instead of 1.5 percent
per year, how many fewer years will it take to double its level of real GDP?
A) It will take 11.6 years fewer.
B) It will take 35 years fewer.
C) It will take 58.3 years fewer.
D) It will take 20 years fewer.
E) It will take 17.9 years fewer.
Answer: A
Topic: Rule of 70
Status: DMC
47) The annual growth rate of an economy is 10 percent. The economy's GDP will double in
about ________ years.
A) 7
B) 10
C) 12
D) 14
E) 20
Answer: A
Topic: Rule of 70
Status: CD new
48) Using the rule of 70, a sustained 3 percent per year real GDP growth rate will
A) last for 70 years.
B) double the current level of real GDP in about 23 years.
C) double the current level of real GDP in about 210 years.
D) double the current level of real GDP in about 70 years.
E) double the current level of real GDP in about 40 years.
Answer: B
Topic: Rule of 70
Status: CD new
16
49) A nation's annual growth rate of real GDP per person is 2 percent. Its standard of living will
A) double in 35 years.
B) not change because its population is growing.
C) fall because of its population growth.
D) double in 10 years.
E) double in 50 years.
Answer: A
Topic: Rule of 70
Status: WM
50) If a country experiences a real GDP growth rate of 6 percent, real GDP will double in
A) 10 years.
B) 11.67 years.
C) 14 years.
D) 17.5 years.
E) 16.67 years.
Answer: B
Topic: Rule of 70
Status: CT
51) This year, real GDP per person in Country A is eight times real GDP per person in Country
B. If Country B's real GDP per person grows at a rate of 5 percent, about how many years will it
take for Country B to reach the level of real GDP per person in Country A in this year?
A) 14 years
B) 28 years
C) 56 years
D) 42 years
E) It will never reach Country A's level of GDP per person
Answer: D
Topic: Rule of 70
Skill: Level 4: Applying models
Status: NU
17
52) This year Iceland has a real GDP per person that is approximately 8 times greater than that of
Cape Verde. Cape Verde's growth rate of real GDP per person was 5.2 percent. If Cape Verde
maintains this current growth rate, approximately how many years will it take for Cape Verde's
real GDP per person to reach the same level that Iceland has this year?
A) 13.5 years
B) 20 years
C) 27 years
D) 40 years
E) 54 years
Answer: D
Topic: Rule of 70
Status: CT
53) If it took 20 years for real GDP to double, what was the growth rate of real GDP?
A) 4.5 percent
B) 3.0 percent
C) 3.5 percent
D) 4 percent
E) 5 percent
Answer: C
Topic: Rule of 70
Status: AA
54) In this year, Country A has a real GDP per person that is 4 times greater than that of Country
B. Country B's growth rate of real GDP per person is 3.5 percent per year. How many years will
it take for Country B's real GDP per person to reach the same level that Country A had in this
year?
A) 10 years
B) 20 years
C) 40 years
D) 60 years
E) 56 years
Answer: C
Topic: Rule of 70
Status: CT
18
55) Suppose Mexico's real GDP per person in 2008 is $6,000 and the U.S. real GDP per person
is $24,000. Mexico has annual growth in real GDP per person of 5 percent. Approximately how
many years will it take Mexico to equal $24,000 of real GDP per person?
A) 14 years
B) 18 years
C) 28 years
D) 36 years
E) 40 years
Answer: C
Topic: Rule of 70
Status: WM
56) Over the past 100 years, real GDP per person in the United States has grown at an average
rate of about ________ per year.
A) 1 percent
B) 2 percent
C) 5 percent
D) 10 percent
E) 7.5 percent
Answer: B
Topic: Eye on the past, how fast has real GDP per person grown?
Status: MR
57) For the world, what period of time experienced the fastest growth rate of real GDP per
person?
A) around 500 B.C.
B) around 400 A.D.
C) between 1000 A.D. and 1500 A.D.
D) after about 1850 A.D.
E) between 1500 A.D. and 1850 A.D.
Answer: D
Topic: Eye on the past, how fast has real GDP per person grown?
Status: MR
19
58) The economic growth rate is measured as the
A) annual percentage change of real GDP.
B) annual percentage change of employment.
C) amount of real GDP.
D) annual percentage change of the population.
E) amount of population.
Answer: A
Status: STUDY GUIDE
59) Economic growth is a sustained expansion of production possibilities measured as the

increase in ________ over a given period.
A) real GDP
B) real GDP per person
C) the standard of living
D) capital per person
E) population
Answer: A
Status: MyEconLab Web Site
60) The economic growth rate is expressed as the ________.

A) annual percentage change of real GDP per person
B) growth rate of real GDP minus the growth rate of population
C) the standard of living
D) annual percentage change of real GDP
E) growth rate of the population
Answer: D
20
61) Real GDP is $9 trillion in the current year and $8.6 trillion in the previous year. The
economic growth rate between these years has been
A) 10.31 percent.
B) 4.65 percent.
C) 5.67 percent.
D) 7.67 percent.
E) $0.4 trillion.
Answer: B
Status: STUDY GUIDE
62) The table gives information about the economy of Japan. The economic growth rate in 1997
is ________ percent.
A) 8.0
B) 0.8
C) 0.08
D) 0.008
E) 4
Answer: B
63) The standard of living is measured by

A) real GDP.
B) employment.
C) employment per person.
D) real GDP per person.
E) the population.
Answer: D
Status: STUDY GUIDE
21
64) If the growth rate of population is greater than a nation's growth rate of real GDP, then its
real GDP per person
A) falls.
B) rises.
C) does not change.
D) might rise, fall, or not change.
E) cannot be measured.
Answer: A
Status: STUDY GUIDE
65) The table above gives information about the economy of France. The growth rate of real
GDP per person in 1998 is ________ percent.
A) 3.1
B) 0.4
C) 2.7
D) 4.0
E) 1.9
Answer: C
66) If real GDP increases by 6 percent and at the same time the population increases by 2
percent, then real GDP per person grows by
A) 6 percent.
B) 4 percent.
C) 2 percent.
D) 8 percent.
E) 3 percent.
Answer: B
Status: STUDY GUIDE
22
67) If real GDP grew 5 percent last year and the population grew 2 percent, then real GDP per
person grew by ________ percent.
A) 10
B) 5
C) 3
D) 2
E) 7
Answer: C
68) If a country experiences a real GDP growth rate of 4 percent, real GDP will double in
A) 14 years.
B) 17.5 years.
C) 23.3 years.
D) 35 years.
E) 25 years.
Answer: B
Topic: Rule of 70
Status: STUDY GUIDE
69) Suppose that in the future, real GDP per person grows 2 percent a year in the United States
and 4 percent a year in China. It will take real GDP per person approximately ________ years to
double in the United States and approximately ________ years to double in China.
A) 70; 35
B) 35; 17.5
C) 35; 8.75
D) 50; 25
E) 20; 10
Answer: B
Topic: Rule of 70
23
70) The table above gives information about the economy of Spain. If the growth rate in 1998 is
maintained, real GDP will double in ________ years.
A) 4
B) 19
C) 10
D) 18
E) 25
Answer: D
Topic: Rule of 70
9.2 The Sources of Economic Growth
1) In a small western nation, labor productivity last year was $20 per hour and total labor hours
were 400 hours. Hence, real GDP
A) was $80,000.
B) was $8,000.
C) was $20.
D) grew by 5%.
E) 00$416,000 over 52 weeks.
Answer: B
Topic: Sources of economic growth
Status: CD new
2) Aggregate hours show a sustained increase only as a result of

A) individuals working more hours.
B) a greater percentage of the population entering the workforce.
C) an increase in the population.
D) increases in overtime work.
E) sustained increases in the labor force participation rate.
Answer: C
Topic: Sources of growth, aggregate hours
Status: WM
24
3) In the long run, most of the growth in aggregate hours comes from
A) population growth.
B) advances in technology.
C) increases in the labor force participation rate.
D) increases in labor productivity.
E) None of the above answers is correct because the premise of the question is wrong since
aggregate hours will not grow in the long run.
Answer: A
Status: MR
4) The data show that in the long run, sustained growth in the quantity of labor will come from
A) continual increases in average hours.
B) constant increases in the labor force participation rate.
C) constant decreases in the unemployment rate.
D) increases in the population.
E) increases in labor productivity.
Answer: D
Status: NU
5) In the United States, there has been ________ in the quantity of labor and, as a benefit of
economic growth, ________ in average hours per worker.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
E) an increase; no change
Answer: B
Status: CT
25
6) As the U.S. economy has grown over time, a benefit of the economic growth has been the fact
that
A) average hours have increased.
B) average hours have decreased.
C) labor productivity has decreased.
D) real GDP per person has decreased.
E) aggregate hours have decreased.
Answer: B
Topic: Sources of growth, average hours
Status: NU
7) Population growth directly brings growth in ________ because the quantity of labor increases.
A) real GDP
B) labor productivity
C) real GDP per person
D) capital per hour of work
E) average hours per worker
Answer: A
Topic: Sources of growth, population
Status: AA
8) Labor productivity is defined as

A) total real GDP.
C) total output multiplied by total hours of labor.
D) real GDP per hour of labor.
E) hours of work per person.
Answer: D
Topic: Sources of growth, labor productivity
Status: TPS
26
9) Labor productivity equals
A) real GDP.
B) real GDP per hour of labor.
C) the total production of labor.
D) the quantity of labor hours divided by real GDP.
E) real GDP divided by the amount of human capital.
Answer: B
Topic: Labor productivity
Status: AA
10) Labor productivity is equal to the quantity of

A) real GDP produced by one hour of labor.
B) workers employed during one hour.
C) real GDP consumed by the total population in one hour.
D) real GDP.
E) workers who are gainfully employed.
Answer: A
Status: WM
11) The quantity of real GDP produced by one hour of labor is defined as
A) real GDP per person.
B) the advance in technology.
C) the growth rate of technology.
D) labor productivity.
E) economic growth.
Answer: D
Status: CT
27
12) Labor productivity is calculated as
A) (real GDP ÷ aggregate hours).
B) (real GDP ÷ aggregate hours × number of workers).
C) (real GDP ÷ number of workers × ratio of capital per worker).
D) (real GDP ÷ technology level).
E) (real GDP ÷ aggregate hours × number of workers) × 100.
Answer: A
Status: DMC
13) Sustained increases in real GDP per person depend on

A) increases in the quantity of labor.
B) increases in the population.
C) increases in average hours.
D) increases in labor productivity.
E) decreases in labor productivity.
Answer: D
Topic: Sources of growth, labor productivity
Status: NU
14) An increase in labor productivity

A) increases the standard of living.
B) decreases the standard of living.
C) might be the result of an increase in the quantity of labor.
D) generally occurs when physical capital decreases because firms must then hire more workers.
E) cannot occur without a corresponding increase in employment.
Answer: A
Status: MR
28
15) Last year, in a nation far to the South, real GDP was $90 million and 900,000 workers were
employed. This year real GDP is $100 million, 950,000 workers are employed, and the number
of hours each worker works per year did not change. Hence, labor productivity
A) has increased.
B) has decreased.
C) has remained constant.
D) cannot be compared between the two years because both real GDP and the number of workers
increased.
E) might have changed, but more information is needed to determine if it changed.
Answer: A
Status: NU
16) If labor productivity is $30 per hour and there are 300 billion hours worked in a year's time,
what is real GDP?
A) 300 billion ÷ $30 = $10 billion
B) $30 × 300 billion = $9,000 billion
C) ($30 ÷ 300 billion) × 100 = $10 billion
D) (300 billion ÷ $30) × 100 = $1 trillion
E) (300 billion ÷ $30) ÷ 100 = $100 million
Answer: B
Status: TPS
17) Canada's population is 31 million and Japan's population is 126 million. Labor productivity
in the two nations is the same. Hence, real GDP per person is ________ and real GDP is
________.
A) higher in Japan; larger in Japan
B) higher in Canada; larger in Canada
C) the same in Japan and Canada; larger in Japan
D) higher in Japan; the same in Japan and Canada
E) higher in Japan; larger in Canada
Answer: C
Status: MR
29
18) If real GDP is $6,460 billion, the population is 184.6 million people, and aggregate hours is
170 billion hours, labor productivity is
A) $2.63 an hour.
B) $2.86 an hour.
C) $35,000.
D) $38.00 an hour.
E) 920 hours.
Answer: D
Status: CT
19) Real GDP is $700 billion, average hours worked per week is 42 and aggregate hours 150
billion hours. What is the economy's labor productivity?
A) $1.80 per hour
B) $3.75 per hour
C) $16.67 per hour
D) $46.67 per hour
E) $4.50 per hour
Answer: D
Status: CD new
20) Labor productivity growth depends on

i. saving and investment.
ii. increases in human capital.
iii. technological growth.
A) i only
B) ii only
C) iii only
D) Both ii and iii
E) i, ii, and iii
Answer: E
Topic: Increase in labor productivity
Status: NU
30
21) Labor force productivity has increased from $30 per hour to $32 per hour over the past year.
This could result from
A) only an increase in real GDP.
B) an increase in real GDP with no change in the aggregate hours or an decrease in aggregate
hours with no change in real GDP.
C) only a decrease in aggregate hours.
D) an increase in the labor force participation rate.
E) an increase in population.
Answer: B
Status: CD new
22) Workers in the United States are ________ productive than workers in China because
________.
A) more; workers in the U.S. have more capital per worker.
B) more; there are more college-educated workers in the United States.
C) less; there are fewer workers in the United States.
D) less; the labor force participation rate is lower in the United States.
E) equally as; China's real GDP per person equals the U.S. real GDP per person.
Answer: A
Status: CD new
23) In recent years, Taiwan has experienced increases in savings and investment. As a result of
the higher investment and saving, we expect
i) increases in physical capital
ii) increases in the inflation rate
iii) advances in technology
A) i and iii.
B) i and ii.
C) ii only.
D) ii and iii.
E) i, ii and iii.
Answer: A
Topic: Increase in labor productivity, physical capital
Status: CD new
31
24) If the stock of physical capital (that is machinery, equipment, etc.) and human capital remain
the same and the population increases, then
A) labor productivity will increase.
B) labor productivity will decrease.
C) the standard of living will increase.
D) the new labor will be more productive.
E) real GDP decreases.
Answer: B
Status: AA
25) The widespread adoption of computers in the workplace has likely lead to
A) no change in the quantity of labor hours.
B) an increase in labor productivity because computers are a capital good.
C) a decrease in labor productivity because computers are a capital good.
D) a decrease in human capital because computers are physical capital.
E) an increase in the supply of labor because people are needed to operate the computers.
Answer: B
Status: CT
26) Which of the following are required for economic growth?

i) more goods and services produced per hour of work
ii) an increase in the average hours of labor per person
iii) an increase in prices
A) i and iii.
B) i and ii.
C) ii and iii.
D) i only.
E) ii only.
Answer: B
Status: CD new
32
27) A reason for an increase in labor productivity growth is
A) an increase in people's human capital.
B) a decrease in the capital stock so that firms must hire more workers.
C) growth in the supply of labor.
D) an increase in the population so that firms hire more workers.
E) an increase in the quantity of labor.
Answer: A
Topic: Increase in labor productivity, human capital
Status: CT
28) Human capital refers to the

A) accumulated skill and knowledge of human beings.
B) accumulated equipment used by human beings.
C) accumulation of money by human beings.
D) accumulation of money and equipment used by human beings.
E) accumulated financial capital people have acquired.
Answer: A
Status: CT
29) Human capital is defined as the

A) amount of machinery human beings have.
B) number of factories built for human beings.
C) accumulated skill and knowledge of human beings.
D) accumulated amount of machinery and factories human beings own.
E) skills that people are born with.
Answer: C
Status: WM
33
30) Increases in human capital can come
A) only from formal schooling.
B) from employing more machinery.
C) only from on-the-job experience.
D) from formal education and on-the-job learning.
E) from nowhere because whatever human capital an individual possesses is what he or she was
born with.
Answer: D
Status: WM
31) Expansion of a nation's human capital can be achieved through

A) education and job experience.
B) education and saving.
C) education and technology improvements.
D) education only.
E) nothing because human capital is determined by the skills people are born with.
Answer: A
Status: DMC
32) Human capital is acquired

A) only in school.
B) only through on-the-job training.
C) only through job experience.
D) through schooling, job training, and experience.
E) only at birth, that is, it's people's inborn talents.
Answer: D
Status: NU
34
33) Labor productivity increases if
i. human capital decreases.
ii. technology advances.
iii. quality of education decreases.
A) i only
B) ii only
C) iii only
D) Both i and ii
E) Both ii and iii
Answer: B
Topic: Increase in labor productivity, technology
Status: CT
34) ________ increases with education, training, and job experience.

i. Physical capital
ii. Human capital
iii. Financial capital
A) i only
B) ii only
C) iii only
D) Both ii and iii
E) i, ii, and iii
Answer: B
Status: TPS
35) Language, writing, and mathematics are examples of

A) physical capital.
C) technologies embodied in human capital.
D) technologies embodied in physical capital.
E) financial capital.
Answer: C
Topic: Labor productivity, technology
Status: NU
35
36) Sustained growth in the quantity of labor hours worked depends on
A) saving and investment.
B) technological change.
C) population growth.
D) government purchases.
E) sustained increases in labor force participation.
Answer: C
Status: TPS
37) U.S. labor productivity slowed during the 1970s because of

i. increasing government taxes and regulations on production.
ii. the necessity to cope with energy price increases.
iii. inflation, which shortened the horizon over which businesses made their borrowing plans.
A) i only
B) ii only
C) iii only
D) Both i and ii
E) i, ii, and iii
Answer: E
Topic: Eye on the U.S. economy, U.S. labor productivity growth
Status: TPS
38) The only source of growth in the quantity of labor that is sustainable over long periods of
time is
A) an increase in the labor force participation rate.
B) population growth.
C) a decrease in labor productivity.
D) a decrease in the unemployment rate.
E) an increase in labor productivity.
Answer: B
Status: STUDY GUIDE
36
39) Labor productivity equals ________.
A) real GDP × aggregate hours
B) real GDP ÷ aggregate hours
C) aggregate hours ÷ real GDP
D) aggregate hours × labor productivity
E) aggregate hours ÷ labor productivity
Answer: B
40) Labor productivity equals

A) real GDP divided by the capital stock.
B) real GDP divided by the population
C) total wages divided by real GDP.
D) real GDP divided by aggregate hours.
E) aggregate hours divided by employment.
Answer: D
41) Real GDP equals aggregate hours

A) divided by labor productivity.
B) minus labor productivity.
C) plus labor productivity.
D) multiplied by labor productivity.
E) multiplied by human capital.
Answer: D
Status: STUDY GUIDE
37
42) If real GDP is $1,200 billion, the population is 60 million, and aggregate hours are 80 billion,
labor productivity is
A) $5.00 an hour.
B) $6.67 an hour.
C) $15.00 an hour.
D) $20,000.
E) $150 an hour.
Answer: C
Status: STUDY GUIDE
43) If aggregate hours are 100 billion hours and labor productivity is $40 an hour, than real GDP
equals
A) $100 billion.
B) $40 billion.
C) $100 trillion.
D) $2.5 trillion.
E) $4 trillion.
Answer: E
Status: STUDY GUIDE
44) Which of the following lists gives factors that increase labor productivity?
A) saving and investment in physical capital, and wage increases
B) expansion of human capital, labor force increases, and discovery of new technologies
C) expansion of human capital, population growth, and discovery of new technologies
D) saving and investment in physical capital, expansion of human capital, and discovery of new
technologies
E) labor force increases and wage increases
Answer: D
Status: STUDY GUIDE
38
45) Growth in physical capital depends most directly upon the
A) amount of saving and investment.
B) number of firms in the nation.
C) speed of population growth.
D) amount of government expenditures.
E) level of human capital.
Answer: A
Status: STUDY GUIDE
46) Human capital is

A) the same as labor productivity.
B) a measure of the number of labor hours available.
C) the accumulated skills and knowledge of workers.
D) the average number of years of schooling of the labor force.
E) is what people are born with and cannot be changed.
Answer: C
Status: STUDY GUIDE
9.3 Theories of Economic Growth
1) Thomas Malthus was an economist who contributed to the ________ theory of growth.
A) classical
B) neoclassical
C) new growth
D) socialist
E) Keynesian
Answer: A
Topic: Classical growth theory
Status: AA
39
2) The classical growth model is most closely associated with
A) John Maynard Keynes.
B) Ben Bernanke.
C) Adam Smith.
D) Robert Solow.
E) Thomas Malthus.
Answer: E
Status: CD new
3) The Malthusian theory

A) is also called the classical growth theory and predicts that we will run out of resources.
B) is also called the neoclassical growth theory.
C) predicts that the real wage will continue to increase as long as technology increases.
D) claims that the subsistence wage will increase over time.
E) shows that the production function will shift upward continuously.
Answer: A
Status: CD new
4) A key element of the classical growth theory is that

A) economic growth can be sustained as long as government intervention does not occur.
B) increases in technology drive economic growth.
C) an increase in population leads to increase in labor supply and a decline in real wage rates.
D) low taxes promote economic growth.
E) market forces drive economic growth.
Answer: C
Status: CD new
40
5) The classical theory was developed in the late 18th and early 19th centuries
A) and therefore is not accepted today.
B) during a time of population decline.
C) and has proponents today who fear population growth and overpopulation.
D) and can not be explained using the modern tool of the production function.
E) and still applies to the most developed nations today, though not to the less developed nations.
Answer: C
Status: WM
6) Classical growth theory predicts that in the long run there will be
A) zero economic growth.
B) positive economic growth.
C) negative economic growth.
D) sustained increases in the productivity growth rate
E) sustained increases in economic growth.
Answer: A
Status: NU
7) According to classical growth theory, people earn only a subsistence real income because of
growth in
A) technology.
B) capital.
C) population.
D) employment.
E) labor productivity.
Answer: C
Status: DMC
41
8) Which of the following are predicted by the classical growth theory?
i) population growth will end economic growth
ii) real GDP per person will return to subsistence level
iii) technology drives persistent economic growth
A) i and ii.
B) i, ii and iii.
C) i only.
D) ii only.
E) i and iii.
Answer: A
Status: CD new
9) If labor productivity rises above the subsistence level then, according to classical growth
theory,
A) population growth will slow down.
B) a population explosion will occur.
C) labor productivity growth permanently increases.
D) real GDP per person will remain above the subsistence level.
E) real GDP per person will fall below the subsistence level.
Answer: B
Status: NU
10) According to classical growth theory, as capital per hour and technology increase,
A) the population grows and eventually real GDP returns to the subsistence level.
B) the population grows but more slowly than real GDP so that people's incomes are
permanently higher.
C) the pursuit of profit causes further increases in capital per hour and technology and economic
growth continues indefinitely.
D) the growth rate of real GDP per person permanently increases.
E) people save more, which increases the capital per hour even more, and so economic growth
continues indefinitely.
Answer: A
Status: DMC
42
11) Classical growth theory predicts that increases in real GDP per person will
A) not last because higher income leads to a population explosion.
B) last because higher growth leads to new technology.
C) last because people make choices in the pursuit of higher profits.
D) not last because higher income encourages smaller families and a lower population growth
rate.
E) last only if the government directs firms to make more investments in capital and new
technology.
Answer: A
Status: CT
12) Classical growth theory predicts that economic growth

A) will continue at the classical rate of 3 percent forever.
B) will eventually stop because of population growth.
C) occurs because of hard-working citizens.
D) is merely an illusion.
E) decreases the supply of labor.
Answer: B
Status: WM
13) The classical growth theory asserts that

A) economic growth will continue indefinitely.
B) economic growth and population growth complement each other.
C) population growth increases a nation's economic growth.
D) population growth will lead to people earning only a subsistence level of income.
E) population growth leads to more growth in technology.
Answer: D
Status: AA
43
14) In classical growth theory, if the income level is above the subsistence income,
A) the economy will keep growing without limit.
B) population grows and lowers real income to its subsistence level.
C) technological growth occurs and keeps real income above its subsistence level.
D) the pursuit of profit will cause economic growth to accelerate.
E) None of the above is correct because the classical growth theory asserts that income can never
exceed the subsistence level.
Answer: B
Status: TPS
15) According to classical growth theory, economic growth occurs when ________ and
economic growth ________.
A) the population increases; does not last forever
B) technology advances; does not last forever
C) the population increases; lasts forever
D) technology advances; lasts forever
E) labor productivity increases; lasts forever
Answer: B
Status: DMC
16) In the classical growth theory, economic growth leads to increases in labor supply which
________ real GDP and ________ the real wage rate.
A) increases; lowers
B) increases; raises
C) decreases; lowers
D) decreases; raises
E) increases; does not affect
Answer: A
Status: RS
44
17) Classical growth theory predicts
A) a slowdown in population growth over time.
B) real GDP will remain at the subsistence level over time.
C) sustained increases in economic growth in the long run.
D) the population growth rate slows as real GDP per person rises.
E) sustained increases in the standard of living in the long run.
Answer: B
Status: NU
18) Real GDP per person did not remain at the subsistence level, as predicted by classical growth
theory, because as GDP per person increased,
A) birth rates remained constant and death rates fell.
B) birth rates eventually fell.
C) technological advances were able to outpace the effects of the continued and increasingly
high birth rate.
D) the total level of real GDP decreased.
E) death rates eventually increased.
Answer: B
Status: NU
19) Which growth theory predicts that even when technology advances, real GDP per person
always returns to a subsistence level of income?
A) Classical growth theory
B) Sustained growth theory
C) Neoclassical growth theory
D) New growth theory
E) Keynesian growth theory
Answer: A
Status: CT
45
20) In which theory of economic growth does an increase in productivity lead to no long run
improvement in living standards?
i. Classical growth theory
ii. Neoclassical growth theory
iii. New growth theory
A) i only
B) ii only
C) iii only
D) ii and iii
E) i and ii
Answer: A
Status: RS
21) Neoclassical growth theory predicts that growth in real GDP is determined by
A) population growth and the pace of technological change.
B) population growth only.
C) choices and the pursuit of wealth.
D) technological change only.
E) the government's actions.
Answer: A
Topic: Neoclassical growth theory
Status: CT
22) Neoclassical growth theory predicts that real GDP will

A) remain at the subsistence level.
B) grow at a rate that is determined by the pace of technological change.
C) grow but at a rate that will slow as time progresses and population growth increases.
D) continue to grow because of the choices people make in the pursuit of profit.
E) grow only when the population grows.
Answer: B
Status: NU
46
23) Neoclassical growth theory assumes that technological advances
A) have a direct relationship to the level of real income per capita.
B) can eliminate diminishing returns of labor and capital.
C) are negative if there is a subsistence level of real income but positive otherwise.
D) result from chance.
E) occurs only when firms can profit from it.
Answer: D
Status: TPS
24) According to neoclassical growth theory, technological advances are the result of
A) chance.
B) people's decisions.
C) massive investment by the government on research and development efforts.
D) discoveries resulting from choices.
E) competition.
Answer: A
Status: DMC
25) The neoclassical growth theory predicts that

i) the subsistence real wage rate will increase over time.
ii) real GDP per person will grow at a rate equal to the population growth rate.
iii) real GDP per person will increase as long as technology also increases.
A) i only.
B) ii and iii.
C) i and iii..
D) iii only.
E) ii only.
Answer: D
Status: CD new
47
26) The neoclassical growth theory assumes that technological change
i. is determined by economic growth.
ii. is random and the result of chance.
iii. results from people's choices.
A) i only
B) ii only
C) iii only
D) Both ii and iii
E) Both i and iii
Answer: B
Status: AA
27) ________ developed the neoclassical growth theory and proposed that ________ will drive
economic growth.
A) Robert Solow; increases in technology
B) Thomas Malthus; increases in technology
C) Adam Smith; population growth
D) Robert Solow; population growth
E) Thomas Malthus; increases in capital per worker
Answer: A
Status: CD new
28) If the U.S. economy grows as proposed by the neoclassical growth model, we would see that
A) real GDP per person will increase as a result of increases in technology.
B) real GDP per person grows slowly as population growth slows.
C) increases in technology decrease capital per worker.
D) random events cause technology increases and economic growth.
E) real GDP increases cause upward shifts in the production function.
Answer: A
Status: CD new
48
29) The neoclassical growth theory predicts that
A) population growth slows economic growth.
B) population growth increases real GDP per person.
C) real GDP per person grows as long as technology keeps advancing.
D) the growth rate of real GDP influences the rate of technological change.
E) eventually people receive only a subsistence level of income.
Answer: C
Status: AA
30) Neoclassical growth theory predicts that

A) the economy will grow as long as the population grows.
B) population grows rapidly and lowers real income level to subsistence.
C) the economy is not subject to diminishing returns..
D) technological growth is necessary to maintain growth in real GDP per person.
E) production activities can be replicated so there is no diminishing returns.
Answer: D
Status: TPS
31) Neoclassical growth theory asserts that

A) population grows rapidly and lowers real income level to subsistence.
B) economies are able to sustain growth indefinitely.
C) real GDP per person grows at a rate determined by the pace of technological change.
D) technological change results from people's choices.
E) profits are a key component determining how rapidly the economy will grow.
Answer: C
Status: TPS
49
32) Economic growth in neoclassical growth theory stops whenever
A) technology stops advancing.
B) population grows rapidly and lowers real income level to its subsistence level.
C) the government controls too much of economic activity.
D) workers lose the incentive to work.
E) profits diminish.
Answer: A
Status: TPS
33) What economic growth theory assigns a key role to technological growth but has no theory
about why technology grows?
A) Classical growth theory
B) Sustained growth theory
C) Neoclassical growth theory
D) New growth theory
E) Keynesian growth theory
Answer: C
Status: CT
34) Which theory of economic growth emphasizes that technological innovations result from
people's choices?
A) i only
B) ii only
C) iii only
D) ii and iii
E) i and ii
Answer: C
Topic: New growth theory
Status: RS
50
35) The new growth theory was developed by ________ and proposes that ________.
A) Paul Romer; the desire for profits drives increases in real GDP per person
B) Robert Solow; increases in technology growth are responsible for economic growth
C) Thomas Malthus; increases in population drive wages to their subsistence level
D) Adam Smith; markets will determine the appropriate economic growth rate
E) Ben Bernanke; changes in the money supply drive economic growth
Answer: A
Status: CD new
36) In explaining economic growth, new growth theory stresses the role played by
A) human choices.
B) population moderation.
C) women in the workforce.
D) the participation rate of elderly workers.
E) the government in directing the nation's investments.
Answer: A
Status: WM
37) According to the new growth theory, which of the following promote economic growth?
i) discoveries that bring profit
ii) choices that expand human capital
iii) random events that create technology change
A) i and iii.
B) i and ii.
C) i, ii and iii.
D) ii only.
E) i only.
Answer: B
Status: CD new
51
38) In new growth theory, growth in real GDP per person occurs because
i. human capital grows indefinitely.
ii. technology advances as a result of choices individuals make.
iii. profit incentives encourage technological change.
A) i only
B) ii only
C) iii only
D) Both i and iii
E) i, ii, and iii
Answer: E
Status: TPS
39) New growth theory asserts that

i. human capital grows because of choices.
ii. discoveries result from choices.
iii. competition brings profits.
A) i only
B) ii only
C) iii only
D) Both i and iii
E) Both i and ii
Answer: E
Status: AA
40) According to the new growth theory, real GDP per person grows because
A) the population increases.
B) the labor force participation rate increases.
C) people make choices in pursuit of profits.
D) the retirement age increases.
E) the government subsidizes firms' research and development.
Answer: C
Status: AA
52
41) Place the following events in the proper sequence according to the new growth theory.
i) labor demand increases
ii) employment increases
iii) an increase in labor productivity shifts the production function upward
iv) the real wage increases
A) iii, i, iv, ii.
B) i, ii, iii, iv.
C) ii, i, iii, iv.
D) iv, iii, ii, i.
E) i, ii, iv, iii.
Answer: A
Status: CD new
42) The new growth theory asserts that profits are

A) permanent, because they are derived from discoveries.
B) temporary, because the discoveries that lead to profits are eventually used by all.
C) an illusion, since costs are never fully covered.
D) permanent, because physical activities can be replicated.
E) not an essential component determining whether the economy grows or not.
Answer: B
Status: WM
43) The new growth theory asserts that

A) the population growth rate will increase when real GDP per person increases.
B) a discovery can be used by only one person, the discoverer.
C) technology improves slowly while population grows rapidly.
D) production processes can be replicated at many different firms in the economy.
E) eventually people earn only a subsistence living.
Answer: D
Status: DMC
53
44) A central theme of the new growth theory is that
A) firms don't really experience profit.
B) humans can work harder than previously thought.
C) the economy doesn't experience diminishing returns.
D) firms don't experience diminishing returns.
E) the government is more efficient than private markets.
Answer: C
Status: WM
45) The new growth theory

A) corrects for poor estimates of population growth.
B) eliminates technological advances from the growth picture.
C) applies to only very poor, less-developed nations.
D) explains the source of technological advances.
E) asserts that economic growth can be rapid but can only persist for a limited period of time.
Answer: D
Status: WM
46) In the neoclassical growth theory, technological advances are the result of ________ and in
the new growth theory, technological advances are the result of ________.
A) chance; chance
B) chance; people's decisions
C) people's decisions; chance
D) people's decisions; people's decisions
E) government funding; competition
Answer: B
Status: MR
54
47) The new growth theory suggests that as the economy grows
A) there are only movements along the production function but no shifts in the curve.
B) there are only shifts in the production function but no movements along the curve.
C) there are both shifts in and movements along the production function.
D) there are neither shifts in nor movements along the production function.
E) the production function will eventually become obsolete because production will increase so
much.
Answer: C
Status: CT
48) New growth theory asserts that ________ will lead us to greater productivity and economic
growth.
A) new machinery
B) government regulation
C) unlimited wants
D) leisure time
E) nothing
Answer: C
Status: AA
49) Which of the following statements is likely to be made by someone who believes in the new
growth theory?
A) Population growth will limit long-run gains in real GDP per person.
B) Competition will encourage discoveries of new ideas leading to greater economic growth.
C) Although technological changes increase real GDP, these changes are random and
unexplainable.
D) Choices made by human capital are likely to be inefficient.
E) Economic growth will eventually slow.
Answer: B
Status: CT
55
50) The new growth theory's comparison of the economy to a perpetual motion machine implies
that
A) permanent growth is not possible.
B) the economy will forever create and destroy jobs.
C) overpopulation will eventually overtake the resources of the planet.
D) technology changes just happen.
E) labor productivity has no influence on the economy.
Answer: B
Status: WM
51) The idea of continuous economic growth as a "perpetual motion machine" best reflects the
prediction of which growth theory?
A) the classical growth theory
B) the traditional growth theory
C) the neoclassical growth theory
D) the new growth theory
E) no growth theory
Answer: D
Status: DMC
52) Which of the following theories predicts that there can be no sustained rise in real income
above the subsistence level?
A) i only
B) ii only
C) iii only
D) Both i and ii
E) None of the above because all the growth theories predict that there will be a sustained rise
above the subsistence level.
Answer: A
56
53) Classical growth theory predicts that increases in
A) real GDP per person are permanent and sustainable.
B) real GDP per person are temporary and not sustainable.
C) resources permanently increase labor productivity.
D) resources permanently increase real GDP per person.
E) competition increase economic growth.
Answer: B
Status: STUDY GUIDE
54) If real income is above the subsistence level then, according to classical growth theory,
A) the population will increase.
B) the population will decrease.
C) the standard of living will continue to improve.
D) labor productivity will increase.
E) more technological advances occur.
Answer: A
Status: STUDY GUIDE
55) According to classical growth theory, when real income ________, the population grows.
A) is less than the subsistence real income
B) exceeds the subsistence real income
C) exceeds capital per hour of labor
D) is less than capital per hour of labor
E) is constant
Answer: B
57
56) Neoclassical growth theory predicts that economic growth is
A) only temporary due to overpopulation.
B) the result of technological advances.
C) impossible due to extremes in weather.
D) caused by women entering the work force.
E) increased by decreasing labor productivity.
Answer: B
Status: STUDY GUIDE
57) According to neoclassical growth theory, real GDP per person will
A) equal the subsistence level in the long run.
B) grow as long as technology advances.
C) grow as long as the population increases.
D) grow as long as physical capital decreases and human capital increases.
E) grow indefinitely because of people's pursuit of profit.
Answer: B
58) In the neoclassical growth theory, growth stops when ________.

A) the population grows faster than capital
B) real GDP per hour of labor equals subsistence income
C) technology stops advancing
D) incentives to make innovations disappear
E) competition disappears
Answer: C
58
59) 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.
E) ultimately people earn a subsistence wage.
Answer: B
60) The new growth theory states that

A) technological advances are the result of random chance.
B) technological advances are the result of discoveries and choices.
C) technological advances are the responsibility of the government.
D) the subsistence level income leads to technological advances.
E) it is impossible to replicate production activities.
Answer: B
Status: STUDY GUIDE
61) According to new growth theory, growth ________.

A) occurs when real GDP greater than the subsistence level
B) is unending
C) ends when competition disappears
D) depends on the population growth rate
E) cannot be sustained without government help
Answer: B
59
62) The theory that suggests that our unlimited wants will lead to perpetual economic growth is
the
A) classical growth theory.
B) sustained growth theory.
C) neoclassical growth theory.
D) new growth theory.
E) Keynesian growth theory.
Answer: D
Status: STUDY GUIDE
63) An increase in labor productivity ________ and ________ the demand for labor.
A) leads to a movement upward along the production function; does not change
B) leads to a movement upward along the production function; decreases
C) shifts the production function upward; does not change
D) shifts the production function downward; increases
E) shifts the production function upward; increases
Answer: E
Status: STUDY GUIDE
9.4 Achieving Faster Growth
1) At its most basic level, economic growth depends on

A) creating the right incentives.
B) saving by the government.
C) government leadership.
D) government's fixing prices to encourage stability.
E) political freedom.
Answer: A
Topic: Preconditions for growth
Status: NU
60
2) If a country lacks _______, economic growth ________.
A) a democratic form of government; cannot occur
B) a proper incentive system; cannot occur
C) pure capitalism; will be slower compared to other countries
D) a proper incentive system; will occur at a pace suggested by the new growth theory
E) economic freedom; will increase at a faster pace
Answer: B
Status: CD new
3) The presence of an incentive system that encourages growth

A) guarantees that growth will occur.
B) creates the right conditions for growth to occur.
C) cannot exist in poor countries.
D) existed even in hunter-gatherer societies.
E) means that the government must be a democracy.
Answer: B
Status: NU
4) All of the following are preconditions for economic growth EXCEPT

i. property rights.
ii. democracy.
iii. free markets.
A) i only
B) ii only
C) iii only
D) Both i and ii
E) i, ii, and iii
Answer: B
Status: CT
61
5) A key reason why some nations show little or no growth is
A) overpopulation that overuses limited resources.
B) lack of incentives to undertake actions toward growth.
C) too much private property not directed by the government.
D) patents in rich nations that keep technology only for the rich.
E) too much international trade so that all economic growth spills over to foreigners.
Answer: B
Status: WM
6) An important condition required for economic growth is

A) a democratic government.
B) a totalitarian government.
C) a libertarian government.
D) economic freedom.
E) the incentive to limit international trade so that all economic growth remains within the
country.
Answer: D
Topic: Preconditions for growth, economic freedom
Status: AA
7) A basic precondition necessary to achieve economic growth is

A) well-functioning factories.
B) well-being of society.
C) a well-functioning legal system.
D) a well-organized work force.
E) a strong central government that directs the nation's research and development activities.
Answer: C
Status: AA
62
8) Economic freedom
A) is not important for nations to grow.
B) must come from a democratic government.
C) is founded, in part, on the rule of law.
D) is created when the nation imposes many regulations on businesses.
E) is harmed by having too many property rights.
Answer: C
Status: WM
9) Economic freedom requires

A) that there are no regulations and restrictions set on businesses and households by the
government.
B) the rule of law and the ability to enforce the laws.
C) strong labor unions.
D) freedom to bribe government officials.
E) that the government be a democracy.
Answer: B
Status: AA
10) Economic freedom provides the

A) political system that encourages democracy.
B) social system that supports families.
C) production system that discourages property rights.
D) incentive system that encourages growth-producing activities.
E) necessary alternative to free markets.
Answer: D
Status: DMC
63
11) Countries that enjoy economic growth
A) have property rights and markets which provide incentives for discovering new technologies.
B) have economies that allow the government to make decisions in everyone's best interests.
C) restrict international trade so that domestic industries can grow.
D) place high taxes on saving and investment.
E) place controls on property rights so that firms are protected from competition.
Answer: A
Status: CD new
12) For economic freedom to exist,

A) copyright laws must be abolished and markets supervised by the government.
B) democracy must exist.
C) property rights must be protected and markets must be free.
D) human capital must be given away free.
E) money must be free.
Answer: C
Status: DMC
13) Hong Kong is an example of an economy that

A) does not experience economic growth because it is not a democracy.
B) experiences economic growth in spite of the fact that is lacks democratic freedom.
C) grows more slowly than other Asian countries because property rights are not valued.
D) needs to promote investment so that economic growth can occur.
E) lacks economic freedom and therefore experiences the slowest economic growth of all
developed economies.
Answer: B
Status: CD new
64
14) A condition necessary for a country to achieve economic growth is
A) high tax rates so the government can purchase a lot of capital equipment.
B) strict environmental regulations.
C) economic freedom.
D) government control of the banking system.
E) democracy.
Answer: C
Topic: Preconditions to economic growth, economic freedom
Status: CT
15) Economic freedom is a precondition for economic growth. Which of the following is a
characteristic of economic freedom?
i. A democratic form of government.
ii. Property rights must be protected.
iii. The government must support and pay for inventions and innovations.
A) i only
B) ii only
C) Both i and ii
D) Both ii and iii
E) Both i and iii
Answer: B
Status: TPS
16) Economic freedom is present, at least in part, when

A) there are no property rights to limit people's freedom.
B) there is no private property.
C) people are able to make personal choices.
D) there is no government.
E) money is free.
Answer: C
Status: NU
65
17) Economic growth is slow or absent in some economies because those lack
A) political freedom.
B) economic freedom.
C) democracy.
D) cultural freedom.
E) a strong government.
Answer: B
Status: DMC
18) A key reason why some countries are growing very slowly is
A) they lack a democratic government.
B) they lack economic freedom.
C) their inflation rate is too high.
D) they are too poor, so there is no saving.
E) there is too much competition within their economies.
Answer: B
Status: NU
19) A reason why many of the third world countries are not achieving an increase in their
standard of living is that they
A) don't have enough natural resources.
B) don't have strong military power to force people to work harder.
C) don't have social institutions with a strong rule of law and economic freedom.
D) strongly encouraged international trade.
E) don't have a strong central government.
Answer: C
Status: AA
66
20) Property rights
A) don't include intellectual property.
B) don't include financial property.
C) don't include physical property.
D) include physical, financial, and intellectual property.
E) slow the economic growth by placing limits on who can use what.
Answer: D
Topic: Preconditions for growth, property rights
Status: WM
21) Property rights assure people that

A) the government will not confiscate their income or savings.
B) the government will provide a minimum standard of living.
C) the factors of production and goods are owned jointly by the government and the people.
D) economic growth will enhance government involvement in the economy.
E) international trade will be limited.
Answer: A
Topic: Preconditions to economic growth, property rights
Status: CT
22) Jose and Julia were discussing the necessary components to achieve economic growth. Jose
stated that the economy must include free markets, specialization and trade, and an ethical
judicial system. Julia reminded Jose that another key component is
A) freedom of speech.
B) freedom of religion.
C) a guaranteed high rate of return on savings.
D) property rights.
E) democracy.
Answer: D
Status: CT
67
23) One possible way of achieving faster economic growth is to
A) regulate the amount of international trade and limit it so that not too much occurs.
B) limit research and development because research and development does not contribute
anything to today's production.
C) assign the government ownership of all capital.
D) protect property rights and free markets.
E) tax saving so that people spend more and firms' profits are higher.
Answer: D
Status: DMC
24) Which of the following are important for countries to promote with property rights and
incentives if economic growth is to occur?
i) specialization
ii) saving and investment
iii) increases in human capital
iv) discovery of new technology
A) i, ii, iii and iv.
B) ii and iii.
C) iii and iv.
D) ii and iv.
E) i, ii and iv only.
Answer: A
Status: CD new
25) One way to achieve faster growth in GDP per person is to increase the
A) number of women working in the home rather than in the workforce.
B) growth rate of the quantity of money.
C) growth rate of human capital.
D) growth rate of the population.
E) limits on international trade in order to keep more of total spending on domestically produced
goods.
Answer: C
Topic: Preconditions for growth, human capital
Status: WM
68
26) The following government policies will help achieve faster economic growth EXCEPT
A) discouraging saving and encouraging spending.
B) encouraging research and development.
C) establishing and protecting property rights.
D) improving the quality of education.
E) increasing saving.
Answer: A
Topic: Policies for faster growth, saving
Status: AA
27) If Turkey wants to promote faster economic growth, it will need to

A) promote incentive systems to encourage saving, research and development, increased trade
and improved education.
B) restrict economic freedom so the government has better control of markets.
C) restrict international trade to protects its own workers.
D) promote government intervention to help markets determine incentives.
E) restrict property rights so that individuals can better share inventions.
Answer: A
Topic: Policies for faster growth
Status: CD new
28) Retirement savings accounts, such as IRAs, help increase economic growth because
A) people have an incentive to work harder and longer hours to save for the future.
B) they keep the interest rates high.
C) savings finances investment.
D) government invests them.
E) they encourage international trade.
Answer: C
Status: AA
69
A) encourage saving.
B) protect the economy from international trade.
C) limit investment because investment adds nothing to production today.
D) eliminate property rights because they prevent people from using other people's ideas.
E) tax saving so that people spend more and businesses make more profit.
Answer: A
Status: DMC
30) East Asian economies have grown

A) rapidly because of high saving rates.
B) rapidly despite a lack of property rights.
C) slowly because of a lack of property rights.
D) slowly because of low saving rates.
E) rapidly because they virtually eliminated international trade.
Answer: A
Status: NU
31) One of the possible roles governments can play in sponsoring growth is to
A) provide tax incentives to encourage saving.
B) own more of the nation's resources in order to put them to use.
C) close the nation to trade in order to protect its domestic producers.
D) make decisions for its citizens as to the most suitable job.
E) limit the use of property rights in order to decrease the harm they create.
Answer: A
Status: WM
70
32) Many economists argue that an incentive to save is
A) high income tax rates.
B) a tax on consumption rather than on income.
C) a tax on income rather than a tax on consumption.
D) greater government regulation of the banking and securities industries.
E) strengthening the property rights that savers have to the physical capital they purchase.
Answer: B
Status: CT

A) abolish the system of patents and copyrights so that everyone can use people's ideas.
B) limit international trade to only a few countries so that the nation is not hurt by too much
trade.
C) encourage research and development.
D) limit schooling in order to have more people in the labor force, producing goods and services.
E) tax saving so that people spend more and businesses' profits are larger.
Answer: C
Topic: Preconditions for growth, R&D
Status: DMC

A) limit international trade.
B) encourage international trade.
C) limit research and development and concentrate on production of goods and services.
D) abolish the system of patents and copyrights so that everyone can use people's ideas.
E) let the government decide what research and development should be undertaken.
Answer: B
Topic: Policies for faster growth, international trade
Status: DMC
71
35) Encouraging international trade will
A) slow economic growth when a country is forced to specialize and trade with other countries.
B) slow economic growth as many workers lose their jobs to foreign workers.
C) speed economic growth as workers diversify their knowledge and limit trade.
D) speed economic growth as workers specialize and trade with others.
E) speed economic growth because international trade limits the harm done by property rights.
Answer: D
Status: CT
36) The fastest growing nations today

A) are not saving but instead are investing.
B) have erected many trade barriers to protect domestic firms.
C) have the fastest growing exports and imports.
D) have non-democratic political systems.
E) have the government directing all their research and development.
Answer: C
Status: NU
37) China's growth rate has ________ that of most other countries, ________.
A) topped; but its real GDP per person is still lower than other industrialized countries
B) lagged; and its real GDP is close to other Asian economies
C) lagged; but its real GDP per person is higher than other Asian economies
D) topped: but its real GDP per person declined in 2008-09.
E) equaled; and its real GDP per person declined in 2008-09.
Answer: A
Topic: Eye on convergence and gaps
Status: CD new
72
38) Governments should promote education because education contributes to the nation's
A) employment.
B) free markets.
C) economic growth potential.
D) international trade.
E) protection of property rights.
Answer: C
Topic: Policies for faster growth, education
Status: DMC
39) Brian is running for state senator and if elected, pledges to improve economic growth. His
plan for economic growth includes increasing spending on public education and providing tax
incentives to encourage improved private education. His plan is likely to
A) slow economic growth because it includes a provision for private education.
B) have no effect on economic growth because property rights are not changed.
C) speed economic growth as the quality of resources improve.
D) fail because the provision for private education limits government involvement in education.
E) have no effect on economic growth because government spending cannot affect the economic
growth rate.
Answer: C
Status: CT
40) If Kenya institutes policies that support economic freedom and growth, it is likely that Kenya
will
A) immediately reap the benefits of double digit increase in economic growth.
B) immediately reap the benefits of a 4 percent to 6 percent increase in economic growth.
C) slowly reap the benefits of economic growth as the economy grows over time.
D) lose control of the economy and plunge into a long recession.
E) suffer from too much competition within its economy.
Answer: C
Topic: Faster growth, the difference policy makes
Status: CT
73
41) Which of the following is NOT a necessary precondition for economic growth?
A) economic freedom
B) democracy
C) property rights
D) free markets
E) ALL of the above are necessary preconditions.
Answer: B
42) Which of the following characteristics is a precondition for economic growth?

i. economic freedom.
ii. free markets
iii. active government policy to discourage saving
A) i only
B) ii only
C) iii only
D) Both i and ii
E) Both ii and iii
Answer: D
43) Economic freedom means that

A) firms are regulated by the government.
B) some goods and services are free.
C) people are able to make personal choices and their property is protected.
D) the rule of law does not apply.
E) the nation's government is a democracy.
Answer: C
Status: STUDY GUIDE
74
44) Property rights protect
A) only the rights to physical property.
B) only the rights to financial property.
C) all rights except rights to intellectual property.
D) rights to physical property, financial property, and intellectual property.
E) the government's right to impose taxes.
Answer: D
Status: STUDY GUIDE
45) Activities that encourage faster growth are

A) high levels of saving and investment in 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) imposing trade barriers to limit international trade and thereby protect national industries.
E) limiting property rights so that everyone can use any invention.
Answer: A
46) Which of the following statements is FALSE?

A) Saving helps create economic growth.
B) Improvements in quality of education are important for economic growth.
C) Free international trade helps create economic growth.
D) Faster population growth is the key to growth in real GDP per person.
E) Economic freedom requires property rights.
Answer: D
Status: STUDY GUIDE
75
47) In order to increase economic growth, a government can ________.
A) discourage research and development
B) decrease funding on education
C) discourage specialization and trade
D) establish property rights and a legal system
E) tax saving in order to encourage more spending
Answer: D
48) Saving
A) slows growth because it decreases consumption.
B) finances investment which brings capital accumulation.
C) has no impact on economic growth.
D) is very low in most East Asian nations.
E) is important for a country to gain the benefits of international trade.
Answer: B
Status: STUDY GUIDE
49) A government policy that taxes saving in order to discourage saving and encourage spending
will ________.
A) slow economic growth
B) speed economic growth
C) create a greater incentive for people to specialize
D) strengthen people's property rights
E) increase the growth rate of capital
Answer: A
76
50) The fastest growing nations today are those with
A) barriers that significantly limit international trade.
B) the fastest growing exports and imports.
C) government intervention in markets to ensure high prices.
D) few funds spent on research and development.
E) the least saving.
Answer: B
Status: STUDY GUIDE
51) Economic growth is enhanced by

A) free international trade.
B) limiting international trade so that the domestic economy can prosper.
C) discouraging saving, because increased saving means less spending.
D) ignoring incentive systems.
E) increasing welfare payments to the poor so they can afford to buy goods.
Answer: A
Status: STUDY GUIDE
77
9.5 Chapter Figures
1) In the figure above, according to the classical model of economic growth, in the long run the
real wage rate equals ________ and the quantity of labor is ________ billions of hours per year.
A) $25; 300
B) $25; 200
C) $35; 200
D) $35; 300
E) More information is needed to answer the question.
Answer: A
Status: MR
78
2) In the figure above, productivity has increased. In which growth model can this type of change
occur?
i. Classical growth model
ii. Neoclassical growth model
iii. New growth model
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
Answer: E
Topic: Growth theories
Status: MR
79
3) In the figure above, productivity has increased. In which growth model is this type of change
the result of people's choices?
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
Answer: C
Status: MR
4) In the figure above, productivity has increased. In which growth model can this type of change
lead to a permanently higher growth rate of real GDP per person?
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
Answer: C
Status: MR
80
9.6 Integrative Questions
1) Economic growth in Cuba has been slow; what can best explain the slow growth?
A) Lack of economic resources
B) Lack of incentive mechanisms and economic freedom
C) Labor productivity is low.
D) A non-democratic form of government
E) Too much competition within the economy
Answer: B
Topic: Integrative
Section: Integrative
Status: TPS
2) The presence of government corruption in some countries

A) slows their economic growth.
B) speeds their economic growth.
C) invalidates the new growth theory's predictions.
D) supports the classical growth theory's predictions.
E) invalidates the neoclassical growth theory's predictions.
Answer: A
Topic: Integrative
Status: RS
3) Which of the following policies encourages economic growth?

A) Increased taxes on income and business profits
B) Reduction of government support of higher education
C) High tariffs and strict import quotas on foreign-made products
D) Creation of tax free savings accounts
E) Limiting the years people spend in education so that they can start productive work
Answer: D
Topic: Integrative
Status: TPS
81
9.7 Essay: The Basics of Economic Growth
1) Why is growth in GDP different from growth in a nation's standard of living? Is it possible for
a nation's GDP to grow while its standard of living falls?
Answer: The standard of living is measured by real GDP per person, so growth in the standard
of living equals growth in real GDP per person. The growth rate of real GDP per person equals
the growth rate of real GDP minus the growth rate of the population. Hence it is indeed possible
for a nation's GDP to grow, while its standard of living decreases. This outcome occurs
whenever the population grows more rapidly than real GDP.
Status: WM
AACSB: Communication
2) How do we calculate growth in a nation's standard of living?

Answer: The standard of living is measured by real GDP per person. Thus growth in the
standard of living is calculated using the growth rate of real GDP per person.
Status: WM
3) What is the Rule of 70?

Answer: The Rule of 70 is that the number of years it takes for the level of any variable to
double is approximately 70 divided the annual percentage growth rate of the variable.
Topic: Rule of 70
Status: TPS
4) A nation's population was 250 million last year and is 255 million this year. If its real GDP
was $8.5 trillion last year and is $8.8 trillion this year, what is its growth rate of real GDP per
person?
Answer: Last year real GDP per person equaled ($8.5 trillion)/(250 million) = $34,000 per
person. This year, real GDP per person is $34,510 per person. Thus the growth in real GDP per
 $34,510 − $34,000 
person equals   × 100 = 1.5 percent.
 $34,000 
Status: WM
82
5) U.S. real GDP per person grew rapidly in the early 1960s. The table above has U.S. real GDP
and population for 1961 and 1962.
a. What was U.S. real GDP per person in 1961?
b. What was U.S. real GDP per person in 1962?
c. Between 1961 and 1962, how rapidly did U.S. real GDP per person grow?
Answer: a. U.S. real GDP per person in 1961 = ($2,432 billion)/(184 million) = $13,217.
b. U.S. real GDP per person in 1962 = ($2,578 billion)/(186 million) = $13,860.
 $13,860 − $13,217 
c. The growth rate of real GDP per person equals   × 100 = 4.9 percent.
 $13,217 
Status: MR
6) If a nation's population grows at 2 percent and its real GDP grows at 4 percent, what is the
growth rate of real GDP per person?
Answer: The growth rate of real GDP per person equals the growth rate of real GDP minus the
population growth rate. Hence, in the question at hand, the real GDP per person growth rate
equals 4 percent minus 2 percent, or 2 percent.
Status: WM
83
7) Suppose that real GDP grows at 3 percent per year. What is the growth rate of real GDP per
person if the population grows at:
a. 2 percent? What happens to the standard of living?
b. 3 percent? What happens to the standard of living?
c. 4 percent? What happens to the standard of living?
Answer:
a. The growth rate of real GDP per person equals the growth rate of real GDP minus the
population growth rate. Hence the growth rate of real GDP per person equals 3 percent minus 2
percent or 1 percent. The standard of living increases because real GDP per person increases.
b. The growth rate of real GDP per person equals 3 percent minus 3 percent or 0 percent. The
standard of living does not change because real GDP per person does not change.
c. The growth rate of real GDP per person equals 3 percent minus 4 percent or -1 percent. The
standard of living decreases because real GDP per person decreases.
Status: NU
8) During 2005, real GDP in Ireland grew 9.8 percent. If Ireland maintains this level of growth in
the future, real GDP will double in approximately how many years?
Answer: With an annual growth rate of 9.8 percent, the Rule of 70 shows that Ireland's real GDP
will double in approximately 70 ÷ 9.8 = 7.1 years.
Topic: Rule of 70
Status: CT
9) Suppose real GDP grows at 7 percent per year and the population grows at 2 percent per year.
How many years will it take for real GDP and real GDP per person to double?
Answer: Use the Rule of 70 for both answers. The growth rate of real GDP is given in the
question, and so the Rule of 70 directly indicates that real GDP doubles in 70 ÷ 7 = 10 years. To
determine the number of years it takes for real GDP per person to double, it is necessary to
calculate the growth rate of real GDP per person. The growth rate of real GDP per person equals
7 percent minus 2 percent or 5 percent per year. Hence the Rule of 70 shows that real GDP per
person doubles in 70 ÷ 5 = 14 years.
Topic: Rule of 70
Status: NU
84
9.8 Essay: The Sources of Economic Growth
1) What three factors can increase aggregate hours? Of the three, explain which is the only one
that can be sustained over long periods of time.
Answer: The three factors that can increase aggregate hours are increases in the population,
increases in average hours per worker, and increases in the labor force participation rate. Of
these three factors, only growth in the population can be sustained over long periods of time.
Average hours per worker faces a limit (168 hours a week minus time spent sleeping), and, in
fact, average hours per worker in the United States has been decreasing over the past decades.
The labor force participation rate also faces a limit (100 percent) and, while rising over the past
decades in the United States, the labor force participation rate has about leveled off. Only
population faces no limit and hence only population growth can be sustained indefinitely.
Topic: Aggregate hours
Status: MR
2) Growth in the quantity of labor depends on the labor force participation rate, average hours,
and the population growth rate. Explain the effect each of the three can be expected to have on
the quantity of labor in the United States in the future.
Answer: Average hours tends to decrease with economic growth. As the economy grows,
average hours likely will continue to decrease, thereby decreasing the quantity of labor. The
labor force participation rate will reach an upper limit. In recent years, the labor force
participation rate has been increasing only slowly, so its effect on aggregate hours probably will
be small. An increase in the population will increase the labor supply and thereby increase the
quantity of labor.. Although the U.S. population growth rate has decreased, it remains positive
and so, in the future, sustained growth in aggregate hours will depend on population growth.
Topic: Aggregate hours
Status: NU
85
3) Real GDP can increase either because the quantity of labor increases or because labor
productivity increases. What is the effect on the standard of living if real GDP increases because
a. the quantity of labor increases?
b. labor productivity increases?
Answer:
a. An increase in real GDP because the quantity of labor increases has no effect on the standard
of living.
b. An increase in real GDP because labor productivity increases boosts the nation's standard of
living.
Status: MR
4) What is the effect on real GDP per person if labor productivity increases? What is the effect
on the nation's standard of living?
Answer: Real GDP equals (aggregate hours) × (labor productivity). Hence an increase in labor
productivity increases real GDP. Real GDP per person equals (real GDP) ÷ (population).
Therefore an increase in real GDP with no change in the population increases real GDP per
person. The nation's standard of living is measured by real GDP per person. So, an increase in
labor productivity boosts real GDP per person and therefore boosts the nation's standard of
living.
Status: CT
5) Explain the difference between the measurement of the standard of living and the
measurement of labor productivity. Would you expect the growth in labor productivity to be the
same as or quite different than the growth in the standard of living?
Answer: The standard of living is real GDP divided by population. Labor productivity is real
GDP divided by aggregate hours. If average hours and the labor force participation are constant,
aggregate hours will grow at the same rate as the population. Thus growth in labor productivity
should be essentially the same as growth in the standard of living.
Status: NU
86
6) Define labor productivity. Discuss the relationship between labor productivity, human capital
growth, and technology change.
Answer: Labor productivity is real GDP per hour of labor, so it equals (real GDP) ÷ (aggregate
hours). The expansion of human capital and the discovery of new technology are two factors that
increase labor productivity. Increasing human capital increases labor productivity because
workers' skills and knowledge increase, which allows them to produce more goods and services
without boosting aggregate hours. Similarly, the discovery and use of new technologies allows
workers to produce more goods and services without increasing aggregate hours.
Status: CT
7) List and explain the three factors that can increase labor productivity.
Answer: The three factors that can increase labor productivity are saving and investment in
physical capital, expansion of human capital, and discovery of new technology. Saving and
investing in physical capital increases the amount of capital per worker and thereby increases
workers' productivity. Increasing the amount of human capital means that workers' skills,
knowledge, and talents increase, which thereby increases their productivity. And, the discovery
and use of new technologies allows workers to produce more goods and services than before,
which increases their productivity.
Status: AA
8) What are the sources of human capital?

Answer: Human capital, the accumulated skills and knowledge people possess, comes from both
formal education and training, and from on-the-job experience. On-the-job experience creates
"learning by doing," in which workers become more knowledgeable about the best way to
accomplish a task as they do the task.
Topic: Labor productivity, human capital
Status: AA
9) Real GDP equals $12 trillion and aggregate hours equals 300 billion hours. What does labor
productivity equal?
Answer: Labor productivity is defined as (real GDP ÷ aggregate hours), so labor productivity
equals ($12 trillion ÷ 300 billion hours) = $40 per hour.
Status: MR
87
10) Labor productivity is $30 per hour and aggregate hours are 165 billion hours. What does real
GDP equal?
Answer: Real GDP equals (labor productivity × aggregate hours) = ($30 per hour × 165 billion
hours) = $4,950 billion.
Status: WM
11) Labor productivity is $20 per hour and aggregate hours are 400 billion hours.
a. What does real GDP equal?
b. Because of technological advances, labor productivity doubles to $40 per hour. Furthermore,
assume that aggregate hours decrease to 300 billion hours. What does real GDP equal?
Answer:
a. Real GDP equals (labor productivity × aggregate hours) = ($20 per hour × 400 billion hours)
= $8 trillion.
b. Real GDP now equals $12 trillion.
Status: MR
9.9 Essay: Theories of Economic Growth
1) In the classical theory of growth, what is the final outcome of an increase in growth and labor
productivity?
Answer: In the classical growth theory, a rise in labor productivity and the resulting economic
growth result in a population explosion that drives real GDP per person back to the subsistence
level. In the classical viewpoint, resources are limited and technological change occurs
infrequently, so that technological advances are not sufficient to compensate for the lack of
resources. Hence, in the long run people earn only a subsistence level of real income.
Status: AA
88
2) "According to the neoclassical growth theory, national incentives to save, invest, accumulate
human capital, and develop new technology influence the country's growth rate of real GDP."
Comment on the accuracy of the previous statement.
Answer: The sentence is inaccurate. The neoclassical growth theory says that a nation's growth
rate of real GDP depends on the growth rate of technology. The neoclassical growth theory
assumes that the growth rate of technology is the result of chance and luck. It is the new growth
theory that asserts that growth depends on people's incentives, so it is the new growth theory that
predicts that a nation's growth rate depends on its national incentives to save, invest, accumulate
human capital, and develop new technology.
Status: CT
3) Of the three economic growth theories, which is the most optimistic about the chances of real
GDP per person growing indefinitely? Which is the most pessimistic? What accounts for the
differences?
Answer: The most optimistic is the new growth theory, which concludes that real GDP per
person can continue to grow indefinitely. The most pessimistic is the classical theory, which
concludes that growth in real GDP per person will stop and that people will produce only the
subsistence level of real GDP per person. The difference in the two conclusions can be traced to
differences in assumptions in three key areas. First, the new growth theory concludes that
technology will advance forever because people, seeking profit, make decisions to develop new
technology. Classical growth theory assumes that technological advances are rare and infrequent.
Second, the new growth theory assumes that the economy is not subject to diminishing returns.
Hence, as the economy accumulates more capital, the returns to capital do not diminish and so
the incentive to add yet more capital continues undiminished. The classical growth theory
assumes that capital (and labor) is subject to diminishing returns. Thus as more capital is
accumulated, the returns diminish and so the incentive to continue adding more capital
disappears. Thus the capital stock eventually stops growing. Finally, the new growth theory
assumes that the population does not grow more rapidly as real GDP per person increases. The
classical theory assumes that whenever real GDP per person exceeds the subsistence level, rapid
population growth occurs and, because of diminishing returns to labor, the increased population
drives the level of real GDP back to the subsistence amount.
Status: MR
89
4) What does the new growth theory predict about the persistence of real GDP gaps among rich
and poor countries?
Answer: The new growth theory predicts that national growth rates depend on the nations'
incentives to save, invest, accumulate human capital, and develop new technologies. Hence if
two nations have different incentives, any real GDP gap between them will persist, whereas if
two nations have similar incentives, any real GDP gap will close.
Topic: Growth in the global economy
Status: CT
5) What does the classical growth theory and the new growth theory predict for global growth
amongst different nations? Comment on the accuracy of the predictions.
Answer: The classical growth theory predicts that nations will produce only the subsistence
level of real GDP per person. This prediction is incorrect. According to the theory, each country
is driven to the subsistence level by increased population growth whenever real GDP per person
exceeds the subsistence amount. Hence the classical theory predicts that the nations with the
highest levels of real GDP per person will be the nations in which real GDP per person is falling
the most rapidly. This prediction also is wildly at variance with the facts.
The new growth theory predicts that nations will grow indefinitely and that the growth rate
depends on the incentives within each nation to save, invest, accumulate human capital, and
develop new technology. Hence the new growth theory predicts that real GDP per person will
converge among some nations (those with similar incentives) while the gaps in real GDP per
person among other nations will persist. This prediction is accurate.
Topic: Growth in the global economy
Status: WM
9.10 Essay: Achieving Faster Growth
1) What is economic freedom and why is it important for economic growth?

Answer: Economic freedom is a condition when people are able to make their own choices, their
private property is protected, and they are free to trade in markets. Economic freedom is a
necessary precondition for economic growth because all three aspects of economic freedom are
highly growth enhancing. People are the best judges of their own interests and abilities, so
allowing them to make their own decisions creates the best decisions about what activities will
be undertaken. Protecting private property is necessary in order to give people the incentives to
specialize and trade as well as to save and invest, all actions that will increase economic growth.
Letting people trade in free markets again respects people's abilities to make the best decisions
for themselves, and also increases people's incentives to specialize and trade.
Topic: Economic freedom
Status: MR
90
2) Why is economic growth so slow or non-existent in many third world countries? What
policies would you propose to improve the situation?
Answer: Slow-growing third world countries generally lack the necessary preconditions for
economic growth: economic freedom, secure property rights, and freely functioning markets. In
many of these nations, a corrupt legal system and government means that the rule of law and
property rights are absent. In order to increase economic growth in these nations, policies that
create economic freedom, secure property rights, and free markets must be adopted. It does not
matter if these policies are adopted by a democratic government or by an authoritarian
government, the key point is that they are necessary for the nation to grow. Thus, specific
policies include creating an efficient legal system that respects the rule of law and enforces
property rights and contracts; eliminating government corruption that undermines the rule of law;
and, in order to establish free markets, decreasing government bureaucracy and limits to trade,
such as high taxes, regulations, and import bans.
Status: AA
3) What policies can a government undertake to achieve faster economic growth?

Answer: There are several policies a government can undertake. First the government must
insure that the preconditions for growth are present. The government must insure that economic
freedom exists, that property rights are enforced, and that markets are free. After these crucial
preconditions are in place, the government can create incentive mechanisms to save, invest, and
innovate; can encourage saving; can encourage research and development; can encourage
international trade; and can improve the quality of education.
Status: TPS
4) A country's leadership believes that the neoclassical growth theory is correct. The country
already has the necessary preconditions for growth, so suggest policy changes the government
might enact to help speed economic growth.
Answer: The policy changes should encourage technological innovation and capital formation
because these are the key engines of growth within the neoclassical growth theory. Hence, the
government should encourage research and development, possibly by directly funding research
and development. In addition, the government should support policies that increase saving,
because an increase in saving will lead to increased investment and hence new capital, some of
which will have the new technologies embodied in it.
Topic: Policies for faster growth, research and development
Status: CT
91
5) Why are the governments of developed countries concerned about the quality of education in
their countries? What effect does education play in determining the country's economic growth
rate and its standard of living? Why does it have this effect?
Answer: Improving the quality of education is an important policy that the government can
undertake to increase the nation's economic growth rate. A higher quality education increases the
nation's human capital. Increases in human capital boost labor productivity and, in turn, the
increase in labor productivity raises the nation's economic growth rate as well as its standard of
living.
Status: DMC
92

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Foundations of Macroeconomics 5th

Edition Bade Test Bank

9.1 The Basics of Economic Growth

1) Economic growth is defined as

2) Economic growth is a sustained expansion of production possibilities, as measured by the

3) A country will likely experience an increase in poverty if

5) Which of the following variables is used to determine a country's economic growth?

6) The growth rate of real GDP is measured by the following formula:

20) Growth in the standard of living is measured by the increase in

59) Economic growth is a sustained expansion of production possibilities measured as the

60) The economic growth rate is expressed as the ________.

63) The standard of living is measured by

9.2 The Sources of Economic Growth

2) Aggregate hours show a sustained increase only as a result of

8) Labor productivity is defined as

10) Labor productivity is equal to the quantity of

13) Sustained increases in real GDP per person depend on

14) An increase in labor productivity

20) Labor productivity growth depends on

26) Which of the following are required for economic growth?

28) Human capital refers to the

29) Human capital is defined as the

31) Expansion of a nation's human capital can be achieved through

32) Human capital is acquired

34) ________ increases with education, training, and job experience.

35) Language, writing, and mathematics are examples of

37) U.S. labor productivity slowed during the 1970s because of

40) Labor productivity equals

41) Real GDP equals aggregate hours

46) Human capital is

9.3 Theories of Economic Growth

3) The Malthusian theory

4) A key element of the classical growth theory is that

12) Classical growth theory predicts that economic growth

13) The classical growth theory asserts that

22) Neoclassical growth theory predicts that real GDP will

25) The neoclassical growth theory predicts that

30) Neoclassical growth theory predicts that

31) Neoclassical growth theory asserts that

39) New growth theory asserts that

42) The new growth theory asserts that profits are

43) The new growth theory asserts that

45) The new growth theory

58) In the neoclassical growth theory, growth stops when ________.

60) The new growth theory states that

61) According to new growth theory, growth ________.

9.4 Achieving Faster Growth

1) At its most basic level, economic growth depends on

3) The presence of an incentive system that encourages growth

4) All of the following are preconditions for economic growth EXCEPT

6) An important condition required for economic growth is

7) A basic precondition necessary to achieve economic growth is

9) Economic freedom requires

10) Economic freedom provides the

12) For economic freedom to exist,

13) Hong Kong is an example of an economy that

16) Economic freedom is present, at least in part, when

21) Property rights assure people that

27) If Turkey wants to promote faster economic growth, it will need to

30) East Asian economies have grown

33) One possible way of achieving faster economic growth is to

34) One possible way of achieving faster economic growth is to

36) The fastest growing nations today

42) Which of the following characteristics is a precondition for economic growth?