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CHAPTER 6: Growth and Ideas

MULTIPLE CHOICE

1. In Romer’s influential paper he divided the economic world into:

a. resources and ideas. d. utilities and objects.
b. objects and resources. e. None of these answers is correct.
c. objects and ideas.
ANS: C DIF: Easy REF: 6.1 TOP: I.
MSC: Remembering

2. Which of the following is an example of an idea?

a. new irrigation techniques d. the steam engine
b. turning sand into computer chips e. All of these answers are correct.
c. the assembly line
ANS: E DIF: Moderate REF: 6.1 TOP: I.
MSC: Evaluating

3. Which of the following flowcharts best summarizes Romer’s description of ideas and growth?
a. Ideas → Nonrivalry → Increasing returns → Imperfect competition
b. Ideas → Capital → Constant returns → Imperfect competition
c. Capital → Rivalry → Increasing returns → Perfect competition
d. Ideas → Rivalry → Increasing returns → Perfect competition
e. Capital → Nonrivalry → Decreasing returns → Imperfect competition
ANS: A DIF: Easy REF: 6.2 TOP: II.
MSC: Understanding

4. According to the text, there are approximately ________ different coherent paragraphs written
with 100 words or less in the English language.
a. 1020,000 d. 10430
b. 20,000 e. 4  1077
c. 10330
ANS: D DIF: Easy REF: 6.2 TOP: II.
MSC: Understanding

5. The amount of raw material in the universe—the amount of sand, oil, and the number of atoms of
carbon, oxygen, and so on—is ________. The number of ways of arranging and using these raw
materials is ________.
a. finite; also finite d. virtually infinite; zero
b. infinite; virtually infinite e. zero; infinite
c. finite; virtually infinite
ANS: C DIF: Easy REF: 6.2 TOP: II.A.
MSC: Remembering

6. In economics, a rival good is one that:

a. cannot be consumed by more than two people at a time.
b. can be consumed by more than one person at a time.
c. is congested if used by more than one person at a time.
d. cannot be consumed by more than one person at a time.
 e. None of these answers is correct.
ANS: D DIF: Easy REF: 6.2 TOP: II.B.
MSC: Understanding

7. In economics, a nonrival good is one that:

a. cannot be consumed by more than one person at a time.
b. can be consumed by more than one person at a time.
c. can be consumed by more than one person at a time but is congested.
d. cannot be consumed by more than two people at a time.
e. None of these answers is correct.
ANS: B DIF: Easy REF: 6.2 TOP: II.B.
MSC: Understanding

8. Which of the following is a nonrival good?

a. a peanut butter sandwich d. All of these answers are correct.
b. orange juice e. None of these answers is correct.
c. a jacket
ANS: E DIF: Easy REF: 6.2 TOP: II.B.
MSC: Analyzing

9. Which of the following is a nonrival good?

a. a TV signal d. a dam
b. a blueprint e. All of these answers are correct.
c. national defense
ANS: E DIF: Easy REF: 6.2 TOP: II.B.
MSC: Analyzing

10. If there are large fixed or research and development costs, such as in the pharmaceutical industry,
production can be characterized by:
a. negative costs. d. large variable costs.
b. constant returns to scale. e. increasing returns to scale.
c. decreasing returns to scale.
ANS: E DIF: Moderate REF: 6.2 TOP: II.C.
MSC: Understanding

11. If Y is a good’s output, X is spending to produce a good, is the fixed cost associated with
production, and C is the average cost of production, which of the following production functions
exhibits increasing returns?
a. d.
b. e.
c.

ANS: D DIF: Moderate REF: 6.2 TOP: II.C.

MSC: Analyzing

12. Increasing returns to scale is characterized by:

a. constantly declining fixed costs.
b. diseconomies of scale; that is, the average cost falls as output rises.
c. economies of scale; that is, the average cost rises as output rises.
d. diseconomies of scale; that is, the average cost is constant as output rises.
 e. economies of scale; that is, the average cost falls as output rises.
ANS: E DIF: Moderate REF: 6.2 TOP: II.C.
MSC: Understanding

13. To get increasing returns to scale using the production function , we need to
replace total factor productivity with:
a. more capital. d. the number 2.
b. the flow of ideas, At. e. twice the factor productivity, .
c. the stock of ideas, At.
ANS: C DIF: Moderate REF: 6.2 TOP: II.C.
MSC: Understanding

14. With the production function , if we double ________, we have an increasing

returns production.
a. capital d. capital, labor, and the stock of ideas
b. capital and the stock of ideas e. labor and the stock of ideas
c. capital and labor
ANS: D DIF: Moderate REF: 6.2 TOP: II.C.
MSC: Analyzing

15. With the production function , if we double ________, we have a constant returns
production.
a. capital d. capital and labor
b. capital, labor, and the stock of ideas e. labor and the stock of ideas
c. capital and the stock of ideas
ANS: D DIF: Moderate REF: 6.2 TOP: II.C.
MSC: Analyzing

16. The production function , where At is the stock of ideas, Kt is capital, and Lt is
labor, assumes:
a. At is rivalrous. d. Lt is rivalrous.
b. At is nonrivalrous. e. At is fixed.
c. Kt is nonrivalrous.
ANS: B DIF: Moderate REF: 6.2 TOP: II.C.
MSC: Understanding

17. The difference between total factor productivity (TFP) in the Solow model and the stock of ideas
in the Romer model is that:
a. TFP grows and ideas are fixed. d. TFP is rivalrous and ideas are not.
b. TFP is fixed and ideas can grow. e. There is no difference.
c. TFP is nonrivalrous and ideas are not.
ANS: B DIF: Moderate REF: 6.2 TOP: II.C.
MSC: Evaluating

18. If there are large fixed costs due to research and development, perfect competition does not
generate new ideas because:
a. firms need to recoup these costs through higher profits.
 b. with monopolistic competition, prices are equal to the marginal cost.
c. with monopolistic competition, prices are equal to the marginal cost minus a markup.
d. perfectly competitive firms always set prices lower than the marginal cost.
e. the government does not adequately fund innovation.
ANS: A DIF: Easy REF: 6.2 TOP: II.D.
MSC: Understanding

19. Because in many industries the cost of generating new ideas is so high, firms must charge a price
________ cost.
a. equal to the marginal d. equal to the average fixed
b. higher than the marginal e. lower than the average fixed
c. lower than the marginal
ANS: B DIF: Easy REF: 6.2 TOP: II.D.
MSC: Understanding

20. In perfect competition, the price is ________; in a monopoly, the price is ________.
a. zero; positive
b. greater than the marginal cost; equal to the marginal cost
c. less than the marginal cost; greater than the marginal cost
d. equal to the marginal cost; greater than the marginal cost
e. positive; zero
ANS: D DIF: Easy REF: 6.2 TOP: II.D.
MSC: Understanding

21. Because of fixed R&D costs, ________ are needed to generate ________.
a. profits; capital d. variable costs; total factor productivity
b. costs; capital e. profits; total factor productivity
c. profits; new ideas
ANS: C DIF: Easy REF: 6.2 TOP: II.D.
MSC: Evaluating

22. The reason perfect competition cannot generate new ideas is that:
a. profits are positive.
b. perfectly competitive firms have no ideas.
c. profits are zero.
d. firms are too small to generate ideas.
e. revenues are positive.
ANS: C DIF: Easy REF: 6.2 TOP: II.D.
MSC: Evaluating

23. Which of the following can be used to give firms incentive to innovate?
a. patents d. lower taxes
b. copyrights e. All of these answers are correct.
c. trade secrets
ANS: E DIF: Easy REF: 6.2 TOP: II.D.
MSC: Evaluating

24. Which of the following can be used to give firms incentive to innovate?
a. patents d. subsidies
b. copyrights e. All of these answers are correct.
 c. prizes
ANS: E DIF: Easy REF: 6.2 TOP: II.D.
MSC: Evaluating

25. The president of Tunisia asks you to suggest an idea to improve the economy’s growth without
worrying about decreasing returns. You suggest:
a. paying a competitive wage.
b. offering firms an incentive to produce new ideas.
c. placing a higher tax on firms.
d. removing legal protection for firms.
e. None of these answers is correct.
ANS: B DIF: Moderate REF: 6.2 TOP: II.D.
MSC: Evaluating

26. An allocation that is ________ exists if there is no way to change a resource allocation that makes
someone worse off when allocating more to another.
a. Hotelling competitive d. Kuhn-Tucker conditional
b. Fama efficient e. Arrow impossible
c. Pareto optimal
ANS: C DIF: Easy REF: 6.2 TOP: II.D.
MSC: Remembering

27. An example of open source software is:

a. Linux. d. Red Hat.
b. Mountain Lion. e. Hummingbird.
c. Win32.
ANS: A DIF: Easy REF: 6.2 TOP: II.E.
MSC: Understanding

28. What might be an explanation for the production of open source, free software?
a. marginal cost at zero d. moral hazard
b. increasing returns e. altruism
c. diminishing marginal utility
ANS: E DIF: Easy REF: 6.2 TOP: II.E.
MSC: Understanding

29. In 1994, the ________ passed the ________ to ________.

a. World Trade Organization; Trade-Related Aspects of Intellectual Property Rights; protect
intellectual property rights
b. Bretton Woods System; General Agreement on Tariffs and Trade; promote free trade
c. United Nations; United Nations Conference on Trade and Development; reduce trade
barriers
d. United States; Toxic Asset Relief Program; improve banking procedures
e. Generalized Agreement on Tariffs and Trade; U.S. Agency for International Development;
improve research potential in developing countries
ANS: A DIF: Easy REF: 6.2 TOP: II.E.
MSC: Understanding

30. In the Romer model, what are the two key outputs produced?
a. a government good and new ideas
 b. a consumption good and new ideas
c. a consumption good and total factor productivity
d. a consumption good and capital
e. None of these answers is correct.
ANS: B DIF: Easy REF: 6.3 TOP: III.
MSC: Understanding

31. In the Romer model, the inputs to production are:

a. capital and labor. d. natural resources, labor, and ideas.
b. capital and ideas. e. labor and total factor productivity.
c. labor and ideas.
ANS: C DIF: Easy REF: 6.3 TOP: III.
MSC: Understanding

32. In the Romer model, the production function , where At is knowledge and Lyt is the
amount of labor in the output sector, exhibits:
a. constant returns to labor and increasing returns to labor and knowledge.
b. constant returns to labor and increasing returns to knowledge.
c. increasing returns to labor and constant returns to labor and knowledge.
d. decreasing returns to labor and constant returns to labor and knowledge.
e. increasing returns to labor and increasing returns to labor and knowledge.
ANS: A DIF: Moderate REF: 6.3 TOP: III.
MSC: Understanding

33. In the knowledge production function represents:

a. natural resources.
b. the cost of producing new ideas.
c. the marginal cost of labor.
d. how good an economy is at generating knowledge.
e. labor’s wage.
ANS: D DIF: Easy REF: 6.3 TOP: III.
MSC: Understanding

34. In the Romer model, ________ is the resource constraint.

a. and d.
b. e. There is no resource constraint.
c.

ANS: B DIF: Easy REF: 6.3 TOP: III.A.

MSC: Remembering

35. In the Romer model, the more labor you dedicate to generating ideas, the ________ but ________.
a. faster you accumulate knowledge; at a loss to current output in the consumption sector
b. faster you accumulate knowledge; at a gain to current output in the consumption sector
c. slower you accumulate knowledge; at a loss to current output in the consumption sector
d. less you accumulate knowledge; at a gain to current output in the consumption sector
e. more knowledge you lose; at a gain to current output in the consumption sector
ANS: A DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Understanding
36. The production function in the Romer model is given by ________, where is the growth rate of
________.
a. ; capital d. ; knowledge
b. ; knowledge e. ; population
c. ; population

ANS: D DIF: Moderate REF: 6.3 TOP: III.A.

MSC: Understanding

37. In the Romer model, output is increasing in the ________ and decreasing in the ________.
a. saving rate; depreciation rate
b. research share; growth rate of knowledge
c. growth rate of knowledge; fraction of population in the ideas sector
d. growth rate of knowledge; depreciation rate
e. saving rate; growth rate of knowledge
ANS: C DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

38. In the Romer model, if an economy allocates all of its labor to production, it will:
a. reduce output.
b. reduce the number of ideas it generates.
c. increase the number of ideas it generates.
d. not generate any ideas.
e. None of these answers is correct.
ANS: D DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

39. The production of new ideas in the Romer model is:

a. increasing in the efficiency of creating knowledge and the fraction of labor in research and
development.
b. decreasing in the efficiency of creating knowledge and increasing the fraction of labor in
research and development.
c. increasing in the efficiency of creating knowledge and decreasing in the fraction of labor
in research and development.
d. increasing in the population growth rate and capital accumulation.
e. decreasing in the efficiency of creating knowledge and in the fraction of labor in research
and development.
ANS: A DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

40. In the Romer model, the growth rate of ideas, , is increasing in the:
a. share of the population doing research and the total population.
b. knowledge efficiency parameter and the population growth rate.
c. knowledge efficiency parameter, the research share, and the total population.
d. knowledge efficiency parameter and the saving rate.
e. share of population engaged in research and development and the saving rate.
ANS: C DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing
41. In the Romer model, the growth rate of knowledge is given by:
a. d.
. .
b. e.
. .

c.
.

ANS: E DIF: Easy REF: 6.3 TOP: III.A.

MSC: Understanding

42. In the Romer model, if Canada and Taiwan have the same fraction of researchers and the same
knowledge efficiency parameter but Canada’s population is larger, then:
a. Taiwan has a higher per capita output growth rate.
b. Canada has a higher per capita output growth rate.
c. each country’s per capita output grows at the same rate.
d. Canada has higher per capita income than Taiwan.
e. Canada’s level of income is greater than Taiwan’s.
ANS: B DIF: Difficult REF: 6.3 TOP: III.A.
MSC: Analyzing

43. Suppose the parameters of the Romer model take the following values: ,
and What is the growth rate of this country’s economy?
a. 10 percent d. 50 percent
b. 40 percent e. 0.10 percent
c. 0.02 percent
ANS: D DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

44. Suppose the parameters of the Romer model take the following values:
and What is the growth rate of this country’s economy?
a. 2 percent d. 10 percent
b. 20 percent e. 0.01 percent
c. 0.2 percent
ANS: B DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

45. Suppose the parameters of the Romer model take the following values:
and What is the number of researchers in this country?
a. 20 d. 0.10
b. 1 million e. 200
c. 100
ANS: C DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

46. Suppose the parameters of the Romer model take the following values:
 and What is the per capita income of this country in the
first period, y1?
a. about 1.19 d. about 14.3
b. about 11.9 e. about 9.9
c. about 12.0
ANS: B DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

47. Suppose the parameters of the Romer model take the following values:
and What is the per capita income of this country in the 10th
period, y10?
a. about 6.13 d. about 11.9
b. about 61.3 e. about 10.9
c. about 12.0
ANS: B DIF: Difficult REF: 6.3 TOP: III.A.
MSC: Analyzing

48. Suppose the parameters of the Romer model take the following values:
and What is the per capita income of this country in the initial
period, y0?
a. about 12.1 d. about 1.19
b. about 11.9 e. about 9.9
c. about 12.0
ANS: E DIF: Moderate REF: 6.3 TOP: III.A.
MSC: Analyzing

49. If the economies of East and West Timor are identical in every way except that East Timor has
fewer researchers:
a. West and East Timor will grow at the same rate.
b. East Timor should grow faster, according to the Romer model.
c. West Timor should grow faster, according to the Solow model.
d. West Timor should grow faster, according to the Romer model.
e. East Timor is smaller than West Timor.
ANS: D DIF: Difficult REF: 6.3 TOP: III.B.
MSC: Analyzing

50. Suppose the Romer model parameters in East Timor are and
while in North Timor they are and
then:
a. neither country grows.
b. East Timor’s per capita income growth rate is 20 percent and North Timor’s is 2 percent.
c. East Timor’s per capita income growth rate is 5 percent and North Timor’s is 0.05 percent.
d. East Timor’s per capita income growth rate is 100 percent and North Timor’s is 1 percent.
e. each country’s per capita income growth rate is 20 percent.
ANS: B DIF: Difficult REF: 6.3 TOP: III.B.
MSC: Analyzing
51. Nonrivalry in the knowledge sector means that:
a. per capita income depends on the total population.
b. per capita income depends on some of the stock of ideas.
c. per capita income depends on the total stock of ideas.
d. labor in the ideas sector also can be used in the output sector.
e. all labor is used in the ideas sector.
ANS: C DIF: Moderate REF: 6.3 TOP: III.B.
MSC: Remembering

52. In the Romer model, ________ is the driving force behind sustained ________ economic growth.
a. labor; long-term d. capital; short-term
b. knowledge; short-term e. capital; long-term
c. knowledge; long-term
ANS: C DIF: Easy REF: 6.3 TOP: III.B.
MSC: Understanding

53. Idea accumulation in the Romer model exhibits:

a. increasing returns to capital.
b. diminishing returns in the stock of ideas.
c. negative returns in the stock of ideas.
d. no diminishing returns in the stock of ideas.
e. diminishing returns to labor.
ANS: D DIF: Easy REF: 6.3 TOP: III.B.
MSC: Understanding

54. Because there are no diminishing returns in the stock of ideas in the Romer model:
a. old ideas continue to contribute to current economic growth.
b. economic growth cannot be sustained forever.
c. the economy eventually reaches a steady state.
d. economic growth eventually slows.
e. new ideas must be continually created.
ANS: A DIF: Moderate REF: 6.3 TOP: III.B.
MSC: Understanding

55. The Romer model might be made more realistic by considering:

a. that there is a fixed labor productivity measure for all countries.
b. the global population instead of a single country’s population.
c. that researchers are heterogeneous.
d. the global stock of ideas.
e. productivity as being infinite.
ANS: D DIF: Moderate REF: 6.3 TOP: III.B.
MSC: Understanding

56. In the Romer model, the Mexican economy:

a. never generates new ideas.
b. can use ideas devised in the United States.
c. cannot use ideas devised in the United States.
d. eventually will reach a steady state.
e. does not have an ideas sector.
ANS: B DIF: Moderate REF: 6.3 TOP: III.H.
 MSC: Evaluating

57. Nonrivalry in the Romer model means that ideas created can:
a. benefit only similar economies.
b. benefit only a few economies across the world.
c. be used only in the economy that devised them.
d. benefit virtually all economies across the world.
e. None of these answers is correct.
ANS: D DIF: Easy REF: 6.3 TOP: III.B.
MSC: Evaluating

58. A balanced growth path is defined as a situation in which the:

a. output growth rate is zero.
b. growth rates of all endogenous variables are variable.
c. growth rates of some of the endogenous variables are constant.
d. growth rates of all endogenous variables are constant.
e. All of these answers are correct.
ANS: D DIF: Easy REF: 6.3 TOP: III.C.
MSC: Remembering

59. The parameter(s) in the Romer model is/are the:

a. initial stock of ideas, the population, the fraction of population in the ideas sector, and the
ideas efficiency parameter.
b. ideas efficiency parameter.
c. fraction of population in the ideas sector and the ideas efficiency parameter.
d. initial capital stock and the fraction of population in the ideas sector.
e. initial capital stock and the ideas efficiency parameter.
ANS: A DIF: Moderate REF: 6.3 TOP: III.C.
MSC: Understanding

60. The reason that economic growth in Luxembourg is greater than the growth rate in the United
States is:
a. that Luxembourg has more researchers.
b. the globalization of ideas.
c. that it has a higher level of capital stock.
d. that there are more resources in the United States and diminishing returns to natural
resources.
e. that the capital depreciation rate is higher in the United States.
ANS: B DIF: Easy REF: 6.3 TOP: III.D.
MSC: Remembering

Figure 6.1: Romer Model: Per Capita Output

61. In the Romer model in Figure 6.1, at time t0, a change in the growth rate of per capita output can be
explained by a(n):
a. decrease in the ideas efficiency parameter.
b. increase in the population.
c. increase in the share of labor engaged in research.
d. increase in the saving rate.
e. decrease in the population.
ANS: B DIF: Moderate REF: 6.3 TOP: III.E.1.
MSC: Analyzing

Figure 6.2: Romer Model: Per Capita Output

62. In the Romer model in Figure 6.2, at time t0, a change in the shape of the production function can
be explained by an increase in the:
a. population.
b. share of labor engaged in research.
c. ideas efficiency parameter.
d. saving rate.
e. growth rate.
ANS: B DIF: Moderate REF: 6.3 TOP: III.E.2.
MSC: Analyzing

63. In the Romer model, if an economy’s population increases:

a. output growth decelerates.
b. output immediately increases and output growth slows.
c. output immediately decreases and output growth slows.
d. output immediately decreases and output growth accelerates.
 e. output growth accelerates.
ANS: E DIF: Moderate REF: 6.3 TOP: III.E.1.
MSC: Analyzing

64. In the Romer model, if an economy’s share of researchers decreases, there will be:
a. an immediate decrease in output and output growth will slow.
b. an immediate increase in output and output growth will slow.
c. an immediate increase in output and output growth will accelerate.
d. an immediate decrease in output and output growth will accelerate.
e. no change in output but output growth will slow.
ANS: B DIF: Moderate REF: 6.3 TOP: III.E.2.
MSC: Analyzing

65. In the ideas sector production function, , there are:

a. increasing returns to the ideas stock but decreasing returns overall.
b. decreasing returns to the ideas stock but increasing returns overall.
c. decreasing returns to the ideas stock and labor.
d. increasing returns to the ideas stock and labor.
e. None of these answers is correct.
ANS: B DIF: Moderate REF: 6.3 TOP: III.F.
MSC: Analyzing

66. Even if there are decreasing returns to the ideas stock in the knowledge sector, the Romer model:
a. cannot explain sustained growth.
b. can explain an economy that reaches its steady state.
c. can explain sustained growth.
d. cannot explain why economies’ saving rates differ.
e. cannot explain why the output sector exhibits decreasing returns.
ANS: C DIF: Easy REF: 6.3 TOP: III.F.
MSC: Understanding

67. In the Romer model, with decreasing returns to the knowledge sector:
a. the transition dynamics appear very similar to those in the Solow model.
b. an increase in the research share decreases the growth rate in the short run.
c. an increase in the research share increases the growth rate in the short and long runs.
d. a decrease in the research share increases the growth rate in the short run.
e. There are no level effects.
ANS: A DIF: Moderate REF: 6.3 TOP: III.F.
MSC: Understanding

68. In the Romer model, with decreasing returns to the knowledge sector:
a. the number of researchers is irrelevant to long-term per capita income.
b. more researchers produce more ideas, raising the long-run growth rate of per capita
income.
c. more researchers produce fewer ideas, raising the long-run growth rate of per capita
income.
d. more researchers produce more ideas, raising the long-run level of per capita income.
e. more researchers cause the knowledge stock to contract.
ANS: D DIF: Moderate REF: 6.3 TOP: III.F.
 MSC: Understanding

69. According to the Case Study on Globalization and Ideas in the text, in ________ there are about
________ for every phone landline in the region.
a. sub-Saharan Africa; 10 cell phones d. Latin America; two cars
b. Southeast Asia; 0.5 computers e. eastern Europe; three modems
c. the Indian subcontinent; five pagers
ANS: A DIF: Easy REF: 6.3 TOP: III.H.
MSC: Remembering

70. In the combined Solow-Romer model, long-run growth is sustained because of:
a. population growth. d. total factor productivity.
b. capital accumulation. e. no capital depreciation.
c. the nonrivalry of ideas.
ANS: C DIF: Easy REF: 6.4 TOP: IV.
MSC: Remembering

71. According to the combined Solow-Romer model, all countries grow at:
a. the same rate in the long run, but actual growth rates can differ across countries for long
periods of time.
b. the same rate in the medium and long runs.
c. different rates forever.
d. the same rate as the United States in each period.
e. different rates in the long run, but actual growth rates are the same across countries for
long periods of time.
ANS: A DIF: Easy REF: 6.4 TOP: IV.
MSC: Remembering

72. In the combined Solow-Romer model, the growth rate of total output, using the standard
production function, is given as:
a. . d. .
b. . e. .
c. .

ANS: B DIF: Easy REF: 6.5 TOP: V.

MSC: Understanding

73. In the combined Solow-Romer model, the growth rate of total output, using the production
function , is given as:
a. . d. .
b. . e. .
c. .

ANS: C DIF: Moderate REF: 6.5 TOP: V.

MSC: Analyzing

74. Labor composition is used in “growth accounting” because it:

a. includes total number of hours worked.
b. can include changes in the age distribution of the labor force.
c. can include the educational attainment in the labor force.
d. includes the total number of workers.
 e. All of these answers are correct.
ANS: C DIF: Moderate REF: 6.5 TOP: V.
MSC: Understanding

75. “Growth accounting” endeavors to:

a. measure GDP.
b. measure economic growth rates.
c. determine how capital accumulates.
d. measure what factors—and in what proportions—affect overall economic growth.
e. measure global output and the proportion of global output attributed to each country.
ANS: D DIF: Easy REF: 6.5 TOP: V.
MSC: Understanding

76. In the growth accounting equation, , B represents

________, while C is called ________.

a. labor composition; capital accumulation
b. the contribution from capital; the (Solow) residual
c. labor composition; the (Solow) residual
d. educational attainment; labor composition
e. None of these answers is correct.
ANS: C DIF: Moderate REF: 6.5 TOP: V.
MSC: Understanding

77. In the growth accounting equation, , A represents

________, while B is called ________.

a. labor composition; capital accumulation
b. the contribution from capital; the (Solow) residual
c. the contribution from capital; labor composition
d. educational attainment; labor composition
e. per capita capital contribution; labor composition
ANS: C DIF: Moderate REF: 6.5 TOP: V.
MSC: Understanding

78. In growth accounting, the residual, gA, is so named because:

a. the economy is complicated.
b. economists know exactly what contributes to growth.
c. it is a way to measure observed TFP growth.
d. it is a way to measure unobserved TFP growth.
e. it measures labor composition.
ANS: D DIF: Moderate REF: 6.5 TOP: V.
MSC: Understanding

79. For the years 1995–2007, if output per person in the private sector grew 2.7 percent, capital
intensity grew 1.1 percent, and labor composition grew 0.2 percent, what was the growth rate of
total factor productivity?
a. 3.6 percent d. 4.0 percent
b. 1.8 percent e. 2.3 percent
c. 1.4 percent
 ANS: C DIF: Moderate REF: 6.5 TOP: V.
MSC: Analyzing

80. For the years 2011–2015, if output per person in the private sector grew 1.9 percent, capital
intensity grew 1.1 percent, and total factor productivity grew 0.2 percent, what was the growth rate
of labor composition?
a. 0.6 percent d. 1.2 percent
b. 2.6 percent e. 1.3 percent
c. 3.4 percent
ANS: A DIF: Moderate REF: 6.5 TOP: V.
MSC: Analyzing

81. For the years 1948–1973, output per person in the private sector grew 3.3 percent, labor
composition grew 0.2 percent, and total factor productivity grew 2.2 percent. What was the growth
rate of capital intensity?
a. −1.5 percent d. 5.3 percent
b. 1.3 percent e. 0.9 percent
c. 3.2 percent
ANS: E DIF: Moderate REF: 6.5 TOP: V.
MSC: Analyzing

Refer to the following table when answering the following questions.

Table 6.1: Growth Accounting
Growth (%) 1948–2011 1948–1973 1973–1995 1995–2007 2007–2011
K/L 0.9 0.9 0.7 1.1 1.1
Labor Comp 0.2 0.2 0.3 0.2 0.4
TFP 1.4 2.2 0.5 1.5 0.4

82. Consider the growth accounting data in Table 8.1. If the production function is given by
, the growth rate of per capita GDP for 1948–2011 is ________ percent.
a. −1.7 d. 2.6
b. 2.1 e. 1.8
c. 3.3
ANS: E DIF: Moderate REF: 6.5 TOP: V.
MSC: Analyzing

83. Consider the growth accounting data in Table 8.1. If the production function is given by
, the growth rate of per capita GDP for 1948–1973 is ________ percent.
a. −1.7 d. 0.0
b. 0.8 e. 2.6
c. 1.1
ANS: E DIF: Moderate REF: 6.5 TOP: V.
MSC: Analyzing

84. Consider the growth accounting data in table 8.1. If the production function is given by
, the growth rate of per capita GDP for 1995–2007 is ________ percent.
a. 2.2 d. 1.5
b. 2.8 e. −0.9
 c. 2.0
ANS: A DIF: Moderate REF: 6.5 TOP: V.
MSC: Analyzing

85. Consider the growth accounting data in table 8.1. If the production function is given by
, the fastest growth rate of per capita GDP occurred during which period?
a. 1948–1973 d. 2007–2011
b. 1973–1995 e. Not enough information is given.
c. 1995–2007
ANS: A DIF: Moderate REF: 6.5 TOP: V.
MSC: Evaluating

86. In growth accounting, if we subtract the capital intensity growth rate and the labor composition
growth rate from the growth rate of output per person, we have:
a. the growth rate of total factor productivity.
b. the Markov residual.
c. capital accumulation.
d. savings.
e. education.
ANS: A DIF: Moderate REF: 6.5 TOP: V.
MSC: Evaluating

87. In the combined Solow-Romer model, an exogenous increase in the saving rate:
a. immediately increases the growth rate of per capita output, which eventually slows to its
previous rate.
b. immediately decreases the per capita output, but the growth rate does not change.
c. increases the growth rate of per capita income, but eventually the economy reaches a new
steady-state level of per capita output.
d. immediately decreases the growth rate of per capita output, which eventually accelerates
to a higher rate.
e. has no impact on the growth rate or level of per capita output.
ANS: A DIF: Difficult REF: 6.5 TOP: IV.
MSC: Evaluating

88. In the combined Solow-Romer model, an exogenous increase in the saving rate:
a. pushes the economy to a lower per capita output balanced growth path.
b. pushes the economy to a higher per capita output balanced growth path.
c. pushes the economy’s growth rate of per capita output to infinity.
d. pushes the economy to a new steady-state level of per capita output.
e. has no impact on the growth rate or level of per capita output.
ANS: B DIF: Difficult REF: 6.5 TOP: IV.
MSC: Evaluating

89. In the combined Solow-Romer model, the total output growth rate:
a. equals the growth rate of ideas.
b. is greater than the growth rate of ideas.
c. is lower than the growth rate of ideas.
d. equals the rate of capital depreciation.
e. is greater than the population growth rate.
 ANS: B DIF: Difficult REF: 6.5 TOP: IV.
MSC: Evaluating

90. In the combined Solow-Romer model, the total output growth rate is greater than in the Romer
model because:
a. the saving rate is higher. d. of capital accumulation.
b. of population growth. e. of a greater research share.
c. capital depreciation is zero.
ANS: D DIF: Difficult REF: 6.5 TOP: IV.
MSC: Evaluating

TRUE/FALSE

1. New irrigation techniques are examples of ideas.

ANS: T DIF: Easy REF: 6.1 TOP: II.A.

MSC: Evaluating

2. The signals of the TV show Dexter are a rival good.

ANS: F DIF: Easy REF: 6.2 TOP: II.B.

MSC: Evaluating
NOT: They are nonrivalrous. It is difficult or too costly to prevent others from watching it if you
are.

3. The “idea” of the assembly line leads to increasing returns.

ANS: T DIF: Easy REF: 6.2 TOP: III.A.

MSC: Evaluating NOT: All firms can use the same production technology.

4. The number of ideas is finite.

ANS: F DIF: Easy REF: 6.2 TOP: II.A.

MSC: Understanding NOT: They are limited only by imagination.

5. The production function , where At is the stock of ideas, Kt is capital, and Lt is

labor, assumes that At is rivalrous.

ANS: F DIF: Moderate REF: 6.2 TOP: II.B.

MSC: Understanding
NOT: The technology “bleeds” throughout the aggregate production process; it is nonrivalrous.

6. There is no difference between the stock of ideas and total factor productivity.

ANS: F DIF: Easy REF: 6.2 TOP: II.B.

MSC: Evaluating
NOT: The stock of ideas changes from one period to the next; factor productivity is assumed to be
an economy-specific idiosyncratic parameter.

7. In a monopolistically competitive market equilibrium, the price is equal to the marginal cost.

ANS: F DIF: Moderate REF: 6.2 TOP: II.C.

 MSC: Understanding

8. Offering inventors a prize is a way of providing an incentive to generate new ideas.

ANS: T DIF: Easy REF: 6.2 TOP: II.C.

MSC: Understanding

9. In the Romer model, the more labor you dedicate to generating ideas, the slower you accumulate
knowledge, but at a loss to current output in the consumption sector.

ANS: F DIF: Moderate REF: 6.3 TOP: III.A.

MSC: Understanding

10. In the Romer model, the growth rate of knowledge is .

ANS: F DIF: Easy REF: 6.3 TOP: III.A.

MSC: Remembering

11. Suppose Chile and Côted’Ivoire have the same fraction of researchers and the same knowledge
efficiency parameter, but Chile’s population is larger. Chile has a higher per capita output growth
rate.

ANS: T DIF: Moderate REF: 6.3 TOP: III.A.

MSC: Evaluating

12. In the Romer model, the creation of capital is the driving force behind sustained long-term
economic growth.

ANS: F DIF: Easy REF: 6.3 TOP: III.A.

MSC: Understanding
NOT: In the Romer model, the generating of ideas sustains long-term economic growth.

13. The Romer model relies on increasing returns to ideas and labor.

ANS: T DIF: Easy REF: 6.3 TOP: III.A.

MSC: Understanding

14. In the Romer model, if the population increases exogenously, the growth of knowledge stays
constant.

ANS: F DIF: Moderate REF: 6.4 TOP: IV.

MSC: Understanding NOT: It increases.

15. According to the combined Solow-Romer model, all countries grow at the same rate in the medium
and long runs.

ANS: F DIF: Moderate REF: 6.4 TOP: IV.

MSC: Understanding
NOT: All countries grow at the same rate in the long run, but actual growth rates can differ across
countries for significant periods of time.

16. In the combined Solow-Romer model, the growth rate of total output, using the standard
production function, is given as .
 ANS: T DIF: Moderate REF: 6.4 TOP: V.
MSC: Understanding

17. In the growth accounting equation for the standard Cobb-Douglas production function,
.

ANS: F DIF: Easy REF: 6.5 TOP: V.

MSC: Understanding

18. In growth accounting, if we subtract the capital intensity growth rate and the labor composition
growth rate from the growth rate of output per person, we have the growth rate of total factor
productivity.

ANS: T DIF: Moderate REF: 6.5 TOP: V.

MSC: Evaluating NOT: We also call it the (Solow) residual.

19. In the growth accounting equation

represents the growth rate of labor composition.

ANS: F DIF: Moderate REF: 6.5 TOP: V.

MSC: Remembering NOT: It represents the (Solow) residual.

20. In the combined Solow-Romer model, an exogenous increase in the saving rate has no effect on
the growth rate or level of per capita output.

ANS: F DIF: Difficult REF: 6.5 TOP: IV.

MSC: Evaluating
NOT: It pushes the economy to a higher per capita output balanced growth path.

21. In the combined Solow-Romer model, the steady-state level of output is positively related to the
saving and depreciation rates.

ANS: F DIF: Difficult REF: 6.5 TOP: VII.

MSC: Evaluating
NOT: It is positive in the saving rate but not the depreciation rate; see equation (6.23) in
Appendix.

SHORT ANSWER

1. How does the Romer model of economic growth exploit the concept of nonrivalry?

ANS:
In the Romer model, new ideas are “public” goods (that is, nonrival in consumption). Essentially,
new ideas can be consumed by everyone, in this case producers, without reducing other
individuals’ consumption of that good. In this context, ideas can be used by everyone, which leads
to increasing returns to scale. This justifies the production function in the Romer model,
, which has increasing returns to scale with respect to both factors together. In the
Romer model, this leads to a balanced growth path, or a constant steady-state growth rate, but not a
steady-state (zero growth) level of output.

DIF: Difficult REF: 6.2 TOP: II.B. MSC: Evaluating

2. Consider the production function , where Y is output and X represents inputs.
Graph this production function. Does it display decreasing, constant, or increasing returns to scale?

ANS:
This is an alternative production function to the one presented in Figure 6.1 in the text. Essentially,
for , output is zero; at output rises at a slope of 1/20. Rays drawn from the
origin to each level output are progressively steeper; that is, average product, Y/X, rises as
production rises (that is, increasing returns to scale).

DIF: Difficult REF: 6.2 TOP: II.C. MSC: Evaluating

3. Consider the following Romer model of economic growth:

(a) If and , what is the growth rate of knowledge in

this economy?
(b) What is the growth rate of per capita output in this economy?
(c) Using the information from year 1, what is the level of per capita output in this economy
in year 5?

ANS:
(a) From equation 6.7 we have the growth rate of knowledge, which is or
.
(b) The growth rate of the economy is from the first equation: in the steady state,
; output and knowledge grow at the same rate.
(c)

DIF: Difficult REF: 6.3 TOP: III. MSC: Analyzing

4. Consider the Romer model. If the percentage of the population engaged in ideas formation, ,
decreases, what are the short- and long-term impacts of this shift?

ANS:
This is the opposite of Figure 6.4; initially, output rises as more people are engaged in production
for current consumption, but because ideas accumulation growth slows, so does output growth.
Thus, output per person initially shifts up, but the slope of the curve becomes less steep.

DIF: Difficult REF: 6.3 TOP: III. MSC: Evaluating

5. Consider the following data:

China India United States Japan Germany Russia
Total R&D/
GNP 1.32 1.23 2.69 2.98 2.48 1.00
Science and
 Engineering
Students (%) 43 25 19 21 47 50
Researchers
in R&D
(per million) 584 157 4,048 5,322 3,154 3,492
Note: Total R&D/GNP is the share of research and development in gross national product
share. Define the percentage of science and engineering students as a representation
of in Romer’s model. All things being equal across all countries, which
country does the Romer model predict will grow the fastest? Explain.

ANS:

In the Romer model, the growth in the ideas (R&D) sector is . Economic growth

is given by . Because Russia has a higher percentage of science and

engineering students, it will grow the fastest.

DIF: Difficult REF: 6.3 TOP: III. MSC: Evaluating

6. Consider the table below, which shows the number of researchers in R&D (per million) in 2010
and the average growth rate of real GDP for the years 1985–2014. Explain how the Romer model
explains the relationship between the number of researchers and economic growth. Given your
answer, does the data below corroborate your story? How might you explain any inconsistencies
between the data and the model?

Table 6.2

China Hungary South Korea Mexico

R&D
Researchers 903 2,131 5,380 340
GDP Growth 6.9% 1.0% 5.7% 2.4%
(Source: Penn World Tables 9.0 and the World Bank)

ANS:
In the Romer model we have two basic equations we can use:

and

From the first equation, we see that higher numbers of researchers lead to a lower level of GDP in
the short run, while the second equation states that more researchers lead to more ideas. Because
ideas contribute to output, in the long run, growth will be higher.
 The most obvious contradiction is the researchers and growth in China and Hungary. Clearly, in
this model, China has fewer researchers per capita but very high growth, and vice versa for
Hungary. The data appears to do OK for South Korea and Mexico, with the most and least number
of researchers, respectively. An obvious explanation for China and Hungary is the term . China
clearly has more workers than Hungary, which contributes to the ideas sector. Secondly, is the
productivity, or efficiency, term ; perhaps Chinese researchers are more productive/efficient, as
they have more access to technology, machinery, education, ideas, and so on. Also, perhaps a
combined Solow-Romer model would apply better in this context, with capital accumulation
explaining much of China’s high growth rate.

DIF: Difficult REF: 6.3 TOP: III. MSC: Analyzing

7. Consider the Cobb-Douglas production function .

(a) Write this in growth-rate terms.
(b) Next, define this in terms of per capita growth and identify the contributions of the
components of per capita growth.
(c) If the growth rate of capital per worker is 1.3 percent, the labor composition growth rate is
0.4 percent, TFP growth is 1.2 percent, and , what is the growth rate of output per
worker? If ?

ANS:
(a) In growth terms we have:
.
(b) To calculate per capita, we need to subtract from each side or

(Note: .) is TFP growth, A is contribution from K/L, and B is labor composition.

(c) If a = 1/2 we have
,
and if a = 1/3,
.

DIF: Difficult REF: 6.5 TOP: V. MSC: Evaluating

8. Consider the data in the following table:

(a) Fill in the missing values, assuming the capital share is equal to  = 1/4.
(b) Which period had the greatest per capita growth? The slowest?
(c) Which period has the slowest TFP growth, and what might have contributed to this?
1948–1973 1973–1995 1995–2007 2007–2011
Y/L 0.9 1.9 1.0
K/L 0.9 0.7 1.1
Labor Comp 0.2 0.2 0.4
TFP 2.2 0.5 1.5

ANS:
We start by noting that we need to use the equation
 in various algebraic positions. Doing so we get:
(a) 1948–1973 1973–1995 1995–2007 2007–2011
Y/L 2.6 0.9 1.9 1.0
K/L 0.9 0.7 1.1 1.1
Labor Comp 0.2 0.3 0.2 0.4
TFP 2.2 0.5 1.5 0.4
(b) We see that the period 1948–1973 had the fastest per capita output growth and 1973–1995
was the slowest, which was the growth slowdown. The Internet expansion of the 1990s had
the second fastest.
(c) The slowest TFP was in 2007–2011, likely due to the Great Recession.

DIF: Difficult REF: 6.5 TOP: V. MSC: Evaluating

9. You have been asked to calculate TFP growth for four countries from 1985–2014: China, Hungary,
South Korea, and Mexico. You decide to reach for the Solow growth model to do your
calculations, specifically, the Cobb-Douglas production function: . Using the data
available in the table below, which shows the average labor share and growth rates of real GDP per
capita, labor composition, and capital per capita from 1985–2014, find the TFP growth rate for
each country. Given what you know about each country, what may explain your results?
Table 6.3
Labor Share Y/L Labor Comp K/L
China 0.60 6.9% 1.1% 9.5%
Hungary 0.65 1.0% –0.7% 2.1%
South Korea 0.55 5.7% 1.8% 7.3%
Mexico 0.45 2.4% 2.5% 3.4%
(Source: Penn World Tables 9.0)

ANS:
We first note that the second column, labor share, is represented by  in the production function.
Converting this equation into growth terms and rearranging to find TFP, we have
. Plugging in the numbers we get:
Table 6.3
Labor Share Y/L Labor Comp K/L TFP
China 0.60 6.9% 1.1% 9.5% 2.4%
Hungary 0.65 1.0% −0.7% 2.1% 0.7%
South Korea 0.55 5.7% 1.8% 7.3% 1.4%
Mexico 0.45 2.4% 2.5% 3.4% −0.6%

Answers depend on students:

• China: for Maoist country, undergone market reforms beginning in mid-1980s; a lot of
state-sponsored investment, export-led growth
• Hungary: former command-style economy, began market reforms after the collapse of
communism in 1989; joined NATO in 1999; joined EU in 2004
• Korea: began export-led growth policy in 1960s; experienced Southeast Asian Crisis (1997);
continued market reforms
• Mexico: import substitution, lots of natural resources, corruption, drug wars, Latin American
debt crisis (early 1980s), Mexican peso crisis (1994), maquiladora production, market
Test Bank for Macroeconomics 5th Edition Charles I Jones

reforms

DIF: Difficult REF: 6.5 TOP: V. MSC: Evaluating

10. You have been asked to calculate real GDP growth rates for four countries from 1985–2014:
China, Hungary, South Korea, and Mexico. You decide to reach for the Solow growth model to do
your calculations, specifically the Cobb-Douglas production function: . Using the
data available in the table below, which shows the average labor share and growth rates of labor
composition, capital per capita, and TFP from 1985–2014, find the output growth rate for each
country. Given what you know about each country, what may explain your results?

Table 6.4
Labor Share Labor Comp K/L TFP
China 0.60 1.1% 9.5% 1.7%
Hungary 0.65 −0.7% 2.1% 0.4%
South Korea 0.55 1.8% 7.3% 1.4%
Mexico 0.45 2.5% 3.4% −1.0%
(Source: Penn World Tables 9.0)

ANS:

We first note that the second column, labor share, is represented by  in the production function.
Converting this equation into growth terms, we have . Plugging in the
numbers we get:

Table 6.4
Labor Share Labor Comp K/L TFP Y/L
China 0.60 1.1% 9.5% 1.7% 6.2%
Hungary 0.65 −0.7% 2.1% 0.4% 0.7%
South Korea 0.55 1.8% 7.3% 1.4% 5.7%
Mexico 0.45 2.5% 3.4% −1.0% 2.0%

Answers depend on students:

• China: for Maoist country, undergone market reforms beginning in mid-1980s; a lot of
state-sponsored investment, export-led growth
• Hungary: former Soviet economy, began market reforms after the collapse of communism
in 1989; joined NATO in 1999; joined EU in 2004
• Korea: began export-led growth policy in 1960s; experienced Southeast Asian Crisis (1997);
continued market reforms
• Mexico: import substitution, lots of natural resources, corruption, drug wars, Latin American
debt crisis (early 1980s), Mexican peso crisis (1994), maquiladora production

DIF: Difficult REF: 6.5 TOP: V. MSC: Evaluating

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