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Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

The table below shows aggregate values for a hypothetical economy. Suppose that this economy has real GDP equal to potential output.

Potential GDP $2500

Net Tax Revenues $50
Government Purchases $200
Investment $100
Consumption $2350
Net Exports -$135

TABLE 26-1

1) Refer to Table 26-1. What is the level of private saving for this economy? 1)
A) $100 B) $150 C) $300 D) $200 E) $50
Answer: A
Explanation: A)
B)
C)
D)
E)

2) New theories of economic growth based on the idea that growth is endogenous 2)
A) stress the role of knowledge and learning in the economy's rate of growth.
B) assume that the growth rate of technology is exogenous.
C) assume that the rate of growth of the economy is equal to the rate of population growth.
D) incorporate factors such as central-bank behaviour.
E) ignore the role of technology.
Answer: A
Explanation: A)
B)
C)
D)
E)

3) Which of the following statements is true of new growth theory, and not true of Neoclassical 3)
growth theory?
A) Economic growth does not have an impact on resource exhaustion.
B) It can explain improved living standards over the long term.
C) Economic growth depends only on population growth.
D) It cannot explain improved living standards over the long term.
E) Economic growth is the result of innovation.
Answer: B
Explanation: A)
B)
C)
D)
E)

1
4) Given the enormous world population growth of recent decades, the present needs and aspirations 4)
of the world's population can likely only be met through
A) reductions in the world's capital stock, as a means of controlling the exhaustion of natural
resources.
B) coordination of fiscal and monetary policies.
C) enormous increases in financial capital.
D) increasing knowledge and technological improvements.
E) relatively small increases in the saving rates of the developing economies.
Answer: D
Explanation: A)
B)
C)
D)
E)

5) The Solow residual is an estimate of changes in 5)

A) labour.
B) economic growth.
C) technology.
D) human capital.
E) physical capital.
Answer: C
Explanation: A)
B)
C)
D)
E)

6) Compared to Neoclassical growth theory, newer "endogenous growth" theories are more ________ 6)
regarding the prospect of continuous increases in the standard of living, due in part to its emphasis
on the ________.
A) optimistic; accelerating depletion of natural resources
B) pessimistic; endogeneity of technological change
C) optimistic; endogeneity of technological change
D) pessimistic; accelerating depletion of natural resources
E) pessimistic; increasing birth rates as a result of higher real income per capita
Answer: C
Explanation: A)
B)
C)
D)
E)

2
7) According to the Neoclassical growth model, which of the following scenarios explains 7)
improvements in long-run material living standards?
A) an increase in population
B) an increase in the stock of physical capital
C) an equal increase in both population and output
D) a decrease in unemployment rates
E) an equal increase in both population and the stock of capital
Answer: B
Explanation: A)
B)
C)
D)
E)

8) Modern growth theories are more optimistic than Neoclassical growth theories because the former 8)
emphasize the unlimited potential of ________.
A) modern capital
B) knowledge-driven technological change
C) modern labour
D) economic theory
E) more educated government policy making
Answer: B
Explanation: A)
B)
C)
D)
E)

9) In Neoclassical growth theory, average material living standards in an economy could fall when 9)
A) additional units of labour are added to the other factors.
B) there is a decline in the population.
C) there is equal percentage growth in capital and labour inputs.
D) additional units of capital are added to the other factors.
E) technology improves.
Answer: A
Explanation: A)
B)
C)
D)
E)

3
10) Which of the following is the best example of the acquisition of human capital? 10)
A) A worker receives new machinery enabling him/her to do the amount of work that was
formerly done by two workers.
B) A worker communicates more quickly and accurately with suppliers because of upgrades to
communications software.
C) A computer chip manufacturer introduces a faster processor for micro-computing.
D) A government-sponsored program increases the amount of investment available per worker.
E) A worker takes a training course that increases his/her productivity.
Answer: E
Explanation: A)
B)
C)
D)
E)

11) If a country transfers resources from the production of consumption goods to the production of 11)
capital goods, the result will be to
A) decrease the long-run growth rate.
B) raise future consumption.
C) raise current living standards.
D) raise current consumption.
E) lower future living standards.
Answer: B
Explanation: A)
B)
C)
D)
E)

12) Over the long term, by far the most potent force for raising average material living standards is 12)
A) redistributing income.
B) appropriate fiscal policies.
C) economic growth.
D) reducing inefficiencies.
E) increasing the money supply.
Answer: C
Explanation: A)
B)
C)
D)
E)

4
The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is
equal to Area 2.

FIGURE 26-1

13) Refer to Figure 26-1. Which of the following costs of economic growth are reflected in this 13)
diagram?
A) environmental degradation
B) resource exhaustion
C) the sacrifice of current consumption
D) lower real interest rate
E) national saving
Answer: C
Explanation: A)
B)
C)
D)
E)

14) For a given level of national income, a decrease in private consumption or government purchases 14)
will cause the equilibrium interest rate to
A) decrease and the flow of national saving to increase.
B) increase and the flow of investment to increase.
C) decrease and the flow of national saving to decrease.
D) increase and the flow of national saving to decrease.
E) increase and the flow of investment to decrease.
Answer: A
Explanation: A)
B)
C)
D)
E)

5
15) Economic growth is often associated with structural change in the economy, and this change can 15)
present difficult policy challenges to governments. Which of the following government policies
would be most useful at addressing the social costs of economic growth?
A) worker re-training and education programs
B) subsidies directed at Canadian manufacturing firms
C) the imposition of trade restrictions to protect Canadian jobs
D) expansionary monetary policy
E) reducing income taxes
Answer: A
Explanation: A)
B)
C)
D)
E)

16) The costs of economic growth include 16)

A) the effects on workers whose skills are made obsolete by technical change.
B) current saving must be sacrificed to increase investment in capital goods.
C) improvements in technology.
D) reduced interest rates.
E) declining future living standards.
Answer: A
Explanation: A)
B)
C)
D)
E)

17) Consider a closed economy with real GDP in the long run of $400, consumption expenditures of 17)
$250, government purchases of $75, and net tax revenue of $20. What is the level of national
saving?
A) $95 B) $55 C) $230 D) $225 E) $75
Answer: E
Explanation: A)
B)
C)
D)
E)

6
18) The Neoclassical growth model assumes that with a given state of technology, 18)
A) increases in the use of a single factor result in constant returns.
B) growth in GDP happens only if the labour force grows more quickly than the amount of
physical capital.
C) the standard of living will decrease if the labour force grows more quickly than the amount of
physical capital.
D) increases in the use of a single factor bring increasing returns.
E) increases in GDP are possible only if all factors are increased at an equal rate.
Answer: C
Explanation: A)
B)
C)
D)
E)

19) Balanced growth of labour and capital in the Neoclassical growth model 19)
A) will not increase the level of per capita GDP.
B) will result in a constant level of GDP.
C) leads to rising material living standards.
D) explains current rising per capita incomes in many countries.
E) is a natural outcome of long-run equilibrium.
Answer: A
Explanation: A)
B)
C)
D)
E)

20) Real GDP is not a good measure of average material living standards because 20)
A) the price level may be changing, which affects what people can afford to buy.
B) it is sensitive to the base year chosen in its calculation.
C) it does not take into account the size of the population.
D) it excludes the role of imported goods.
E) it is biased by the changes in the inflation rate.
Answer: C
Explanation: A)
B)
C)
D)
E)

7
21) The Neoclassical growth model assumes that, with a given state of technology, increases in the use 21)
of a single factor will eventually
A) increase the average product of the factor.
B) decrease the average product of the factor.
C) lead to a decrease in total output by the factor.
D) lead to an increase in the material standard of living.
E) lead to an increase in the marginal output of the factor.
Answer: B
Explanation: A)
B)
C)
D)
E)

22) For a given level of national income, an increase in private consumption or government purchases 22)
will cause national saving to
A) decrease.
B) exceed investment.
C) grow at a constant rate.
D) increase.
E) remain unchanged from its initial level.
Answer: A
Explanation: A)
B)
C)
D)
E)

23) Modern or "new" theories of long-run economic growth are based on the assumptions that 23)
technological change is mainly ________ to an economy and that investment yields ________
marginal returns.
A) exogenous; increasing
B) endogenous; decreasing
C) exogenous; constant
D) exogenous; diminishing
E) endogenous, increasing
Answer: E
Explanation: A)
B)
C)
D)
E)

8
24) Investment in innovation is often considered to have increasing marginal returns because 24)
A) after the initial investment is made, subsequent investors face more difficult and expensive
production problems.
B) of market development costs and the "public good" nature of knowledge.
C) innovation is mostly through "leaning by doing".
D) new products increase firms' profits.
E) R&D costs are negligible relative to firms' total costs.
Answer: B
Explanation: A)
B)
C)
D)
E)

25) Consuming fewer goods today in order to invest resources in capital goods is the ________ of 25)
economic growth.
A) external cost
B) investment cost
C) opportunity cost
D) total cost
E) social cost
Answer: C
Explanation: A)
B)
C)
D)
E)

9
The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is
equal to Area 2.

FIGURE 26-1

26) Refer to Figure 26-1. The area marked Area 1 represents 26)
A) the value of the investment in capital goods undertaken by Economy A.
B) the opportunity cost incurred by Economy A for sacrificing current consumption, as
compared to Economy B.
C) the opportunity cost incurred by Economy B for sacrificing current consumption, as
compared to Economy A.
D) the value of consumption from Year 0 to Year X in Economy A.
E) the value of the investment in capital goods undertaken by Economy B.
Answer: C
Explanation: A)
B)
C)
D)
E)

10
The diagram below show the market for loanable funds assuming that national income is constant at Y*.

FIGURE 26-2

27) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is 27)
reflected by I0 D. Now suppose the government implements a revenue-neutral tax policy that
encourages investment. What is the effect on the quantity of national saving?
A) National saving shifts to NS1 , investment demand shifts to I1 D, and the quantity of national
saving rises to I1 .
B) Investment demand shifts to I1 D and the quantity of national saving supplied rises to I1 .
C) Investment demand shifts to I1 D, national saving shifts to NS1 , and the quantity of national
saving rises to I3 .
D) There is no effect on NS or ID and the quantity of national saving supplied remains at I*.
E) National saving shifts to NS1 , and the quantity of national saving supplied rises to I2.
Answer: B
Explanation: A)
B)
C)
D)
E)

11
28) If a country experiences growth in "total factor productivity", then 28)
A) all growth in real GDP can be explained by growth in the capital stock.
B) material standards of living are falling.
C) none of the growth in real GDP can be accounted for by growth in capital and the labour
force.
D) all growth in real GDP can be explained by growth in the labour force.
E) there is some growth in real GDP that cannot be accounted for by growth in capital or the
labour force.
Answer: E
Explanation: A)
B)
C)
D)
E)

29) For a given level of technology, a more rapid rate of economic growth can probably be achieved 29)
only if a country's citizens are prepared to
A) decrease interest rates.
B) sacrifice some present consumption.
C) redistribute income.
D) increase their demand for goods and services.
E) pay more taxes.
Answer: B
Explanation: A)
B)
C)
D)
E)

12
The diagram below show the market for loanable funds assuming that national income is constant at Y*.

FIGURE 26-2

30) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is 30)
reflected by I0 D. Now suppose the government implements a revenue-neutral tax policy that
encourages investment. What is the effect on the real interest rate?
A) There is no effect on NS or ID, and the interest rate remains at i*.
B) Investment demand shifts to I1 D, and the real interest rate rises to i 2 .
C) National saving shifts to NS1, and the real interest rate falls to i 3 .
D) The real interest rate rises because of the decrease in the budget surplus.
E) The real interest rate falls because of the decrease in the budget surplus.
Answer: B
Explanation: A)
B)
C)
D)
E)

31) According to the Neoclassical growth model, it is most likely that GDP would increase, but that 31)
average material living standards would fall, as a result of
A) an increase in the working population.
B) a better educated labour force.
C) a growing capacity to develop and incorporate new innovations.
D) a fast-growing capital stock.
E) an increase in the availability of natural resources.
Answer: A
Explanation: A)
B)
C)
D)
E)

13
The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is
equal to Area 2.

FIGURE 26-1

32) Refer to Figure 26-1. Suppose Economy A jumps to the path of Economy B at Year 0 by increasing 32)
the share of GDP that is saved. In that case, which of the following statements about Economy A is
true?
A) By Year X, Economy A is better off in terms of material living standards for having jumped to
the path of Economy B.
B) By Year X, Economy A is saving and investing the same share of its national income as it
would have been had it stayed on its original path.
C) By Year Y, the increase in consumption made possible by the economy's higher growth rate
equals the consumption sacrificed in earlier years.
D) By jumping to a new growth path at Year 0, Economy A has increased the share of national
income that is consumed.
E) Economy A will not be able to regain the losses in consumption it incurs by jumping to the
path of Economy B.
Answer: C
Explanation: A)
B)
C)
D)
E)

14
The diagram below show the market for loanable funds assuming that national income is constant at Y*.

FIGURE 26-2

33) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is 33)
reflected by I0 D. Now suppose there is a reduction in government purchases. What is the effect on
investment demand?
A) Investment demand shifts to I1 D, causing an increase in the quantity of investment demanded
from I* to I3 .
B) National saving shifts to NS1, and investment demand shifts to I1 D, causing an increase in the
quantity of investment demanded from I* to I3 .
C) There is no effect on NS or ID, and the quantity of investment demanded remains at I*.
D) Investment demand shifts to I1 D, causing an increase in the quantity of investment
demanded from I* to I1 .
E) National saving shifts to NS1, causing an increase in the quantity of investment demanded
from I* to I2 .
Answer: E
Explanation: A)
B)
C)
D)
E)

15
34) In new theories of economic growth, "learning by doing" contributes to endogenous technological 34)
change because
A) "learning by doing" increases the marginal product of physical capital.
B) information at all stages of the design and production processes is fed upstream and
contributes to further innovation.
C) new technical knowledge can be transferred at zero cost.
D) knowledge can be considered a public good.
E) knowledge can be considered a private good.
Answer: B
Explanation: A)
B)
C)
D)
E)

35) If real income grows at approximately 2 percent per year, the number of years it will take for real 35)
income to double is approximately
A) 5. B) 12. C) 24. D) 36. E) 72.
Answer: D
Explanation: A)
B)
C)
D)
E)

16
The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is
equal to Area 2.

FIGURE 26-1

36) Refer to Figure 26-1. Which of the following statements about Economies A and B is correct? 36)
A) Economies A and B will have equal material living standards beginning at Year X.
B) Economy B will sustain higher material living standards than Economy A in the long run.
C) Economies A and B will have equal material living standards beginning at Year 0.
D) Economy A will sustain higher material living standards than Economy B in the long run.
E) Economies A and B will have equal material living standards beginning at Year Y.
Answer: B
Explanation: A)
B)
C)
D)
E)

37) A common measure of a country's rate of economic growth is 37)

A) the change in output per capita.
B) the marginal efficiency of capital.
C) the level of output per capita.
D) the level of real gross domestic product.
E) the capital-output ratio.
Answer: A
Explanation: A)
B)
C)
D)
E)

17
38) An increase in the government budget surplus, everything else constant, will cause a(n) 38)
A) equal increase in private consumption.
B) decrease in the growth rate.
C) equal decrease in private investment.
D) decrease in national saving.
E) increase in national saving.
Answer: E
Explanation: A)
B)
C)
D)
E)

39) Consider the market for loanable funds in the long run. The national saving curve is upward 39)
sloping because an increase in the real interest rate
A) decreases the supply of private saving.
B) leads households to reduce their current consumption.
C) leads to an increase in investment demand.
D) decreases the supply of public saving.
E) leads households to increase their current consumption.
Answer: B
Explanation: A)
B)
C)
D)
E)

40) For a given level of national income, a decrease in government tax revenues will cause 40)
A) an increase in national saving.
B) a decrease in consumption.
C) no effect on national saving.
D) an increase in the growth rate.
E) a decrease in national saving.
Answer: E
Explanation: A)
B)
C)
D)
E)

18
41) The Neoclassical growth model assumes that, with a given state of technology, increases in the use 41)
of a single factor eventually cause the
A) marginal product of the factor to fall.
B) average product of the factor to increase.
C) material standard of living to increase.
D) marginal product of the factor to increase but at a decreasing rate.
E) marginal product of the factor to increase at an increasing rate.
Answer: A
Explanation: A)
B)
C)
D)
E)

19
The diagram below shows the market for loanable funds in the long run.

FIGURE 26-3

42) Refer to Figure 26-3. Suppose the interest rate in this market for loanable funds is 2 percent. In this 42)
case there is an excess ________ loanable funds of ________ billion dollars.
A) demand for; -30
B) demand for; 30
C) supply of; 30
D) supply of; 50
E) demand for; 80
Answer: B
Explanation: A)
B)
C)
D)
E)

20
43) Which of the equations is a correct expression for national saving in the long run when real GDP 43)
equals potential output?
A) NS = T - G
B) NS = T - G - C
C) NS = Y* - C + T - G
D) NS = Y* - C - G
E) NS = Y* - T - C
Answer: D
Explanation: A)
B)
C)
D)
E)

44) Sustained economic growth in the long run would be fostered by 44)
A) expansionary fiscal policy.
B) expansionary monetary policy.
C) elimination of an output gap.
D) decreasing excise taxes on consumer goods.
E) technological improvements embodied in physical or human capital.
Answer: E
Explanation: A)
B)
C)
D)
E)

45) The "new" theories of economic growth emphasize that basic research ________ to price and profit 45)
signals.
A) is directly related and product development is inversely related
B) is unaffected by but product development is directly related
C) and product development are both unrelated
D) and product development are both directly related
E) is directly related and population growth is inversely related
Answer: D
Explanation: A)
B)
C)
D)
E)

21
46) In Neoclassical growth theory, an increase in the labour force ________ total output and ________ 46)
total output per person.
A) increases; increases
B) leaves constant; leaves constant
C) leaves constant; reduces
D) increases; reduces
E) increases; leaves constant
Answer: D
Explanation: A)
B)
C)
D)
E)

47) Consider the competing products made by Apple (iPhone) and RIM (Blackberry). The innovation 47)
generated by these firms as a result of their intense rivalry is an example of
A) constant returns to scale.
B) decreasing marginal returns.
C) exogenous technological change.
D) endogenous technological change.
E) covert collusion.
Answer: D
Explanation: A)
B)
C)
D)
E)

48) According to the Neoclassical growth model, which of the following scenarios (other things being 48)
equal) explains progressively smaller increases in per capita GDP?
A) an equal increase in both population and the stock of capital
B) a decrease in unemployment rates
C) an increase in population
D) an increase in the capital stock
E) an equal increase in population and output
Answer: D
Explanation: A)
B)
C)
D)
E)

22
49) Alleviation of poverty is easier in a growing economy mainly because 49)
A) individuals are more likely to object to the redistribution of income when they earn more.
B) nobody has to be made worse off when the increment to income caused by growth is
redistributed.
C) wage rates for low-income people are naturally rising.
D) poor individuals are relatively easier to be identified in a growing economy.
E) everyone, including the poor, benefits equally from growth.
Answer: B
Explanation: A)
B)
C)
D)
E)

50) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5 50)
percent each and total output (Y) increases by 5 percent as a result, then this production function is
displaying
A) diminishing marginal returns.
B) a change in technology.
C) constant returns to scale.
D) increasing returns to scale.
E) decreasing returns to scale.
Answer: C
Explanation: A)
B)
C)
D)
E)

23
The diagram below shows the market for loanable funds in the long run.

FIGURE 26-3

51) Refer to Figure 26-3. Suppose the interest rate in this market for loanable funds is 2 percent. 51)
Which of the following statements correctly describes the adjustment that will occur in this market?
A) The excess demand for investment will push up the real interest rate, which will increase the
quantity demanded of investment and decrease the quantity supplied of saving.
B) The excess demand for investment will push down the real interest rate, which will decrease
the quantity demanded of investment and increase the quantity supplied of saving.
C) The excess supply of saving will push up the real interest rate, which will decrease the
quantity demanded of investment and increase the quantity supplied of saving.
D) The excess supply of saving will push down the real interest rate, which will decrease the
quantity demanded of investment and increase the quantity supplied of saving.
E) The excess demand for investment will push up the real interest rate, which will decrease the
quantity demanded of investment and increase the quantity supplied of saving.
Answer: E
Explanation: A)
B)
C)
D)
E)

24
52) "Embodied technical change" is said to occur when 52)
A) innovations in the organization of production take place which do not involve changes in the
form of capital used.
B) older capital equipment is replaced with different, more productive, capital.
C) techniques of managerial control are improved.
D) the capital-labour ratio is increasing.
E) the labour force acquires new skills that can be used across a wide range of industries.
Answer: B
Explanation: A)
B)
C)
D)
E)

53) Long-run economic growth can help alleviate the problems of poverty by 53)
A) creating new low-paying jobs for the unemployed.
B) reallocating income away from low-value production to increase the incentives for
high-value production.
C) generating more resources that can be used to reduce income inequality.
D) requiring increased saving on the part of most of the population.
E) increasing future consumption for the middle class.
Answer: C
Explanation: A)
B)
C)
D)
E)

54) According to the "new" theories of economic growth, increasing marginal returns to capital 54)
investment is
A) impossible because diminishing returns are unavoidable.
B) impossible, and is thus a weak source of growth.
C) possible after initial fixed costs of innovation have been borne.
D) possible only if the capital is government-owned infrastructure.
E) possible, but only in the early stages of innovation before imitators rush in to drive prices
down.
Answer: C
Explanation: A)
B)
C)
D)
E)

25
55) Consider a closed economy in the long run. A country with a low national saving rate (as a fraction 55)
of real GDP) is likely to have
A) trouble achieving potential real national income in the short run.
B) an AS curve moving continually to the right.
C) either a high or low growth rate depending on the investment schedule.
D) a low growth rate because sustained high investment is not possible with low saving.
E) a high growth rate because aggregate expenditure will be high out of any given income.
Answer: D
Explanation: A)
B)
C)
D)
E)

56) Consider the Neoclassical growth model. The effect of an increase in population (or the labour 56)
force) in an economy, with everything else held constant, is
A) an increasingly aging population.
B) a decrease in the capital-output ratio.
C) an inward shift of the production possibilities boundary.
D) an increase in per capita national income.
E) a decrease in per capita output.
Answer: E
Explanation: A)
B)
C)
D)
E)

57) Resource exhaustion is not considered to be among the main factors that limit economic growth 57)
because
A) there are limitless supplies of resources, at high enough prices.
B) resources can be obtained from other planets as technology advances.
C) different types of inputs are used in production over time.
D) the population growth rate is decreasing over time and projected to be negative in the future.
E) technological advances change the nature of production over time and also make more
resources available for extraction.
Answer: E
Explanation: A)
B)
C)
D)
E)

26
58) The costs of long-run economic growth include: 58)
1) declining future average living standards;
2) that current consumption must be sacrificed to increase investment in capital goods;
3) current increases in investment may only generate greater consumption in the distant future.
A) 2 only B) 1 only C) 2 and 3 D) 3 only E) 1 and 2
Answer: C
Explanation: A)
B)
C)
D)
E)

59) Which of the following statements concerning national saving is true? 59)
A) An increase in the rate of saving will lead to a reduction in consumption and therefore to both
a short-run and a long-run decrease in national income.
B) An increase in the rate of saving will cause an immediate increase in national income, but
may cause a drop in national income in the long-run.
C) An increase in the rate of saving will always be offset by a reduction in private investment.
D) A country's saving rate is unrelated to its growth rate.
E) An increase in the rate of saving will lead to a short-run reduction in national income, but to
higher economic growth in the long run.
Answer: E
Explanation: A)
B)
C)
D)
E)

60) An example of "embodied technical change" is 60)

A) better methods of inventory control.
B) the replacement of old computer chips with new ones designed for faster processing.
C) the strengthening of social infrastructure, such as delivery of basic health-care services.
D) education that teaches a wider portion of the labour force basic numeracy.
E) the development of better intellectual property law.
Answer: B
Explanation: A)
B)
C)
D)
E)

27
 61) In the long run, an increase in the demand for investment pushes ________ the real interest rate, 61)
encourages ________ saving by households, and leads to a ________ future growth rate of potential
output.
A) down; less; lower
B) up; more; higher
C) up; less; lower
D) down; less; higher
E) up; more; lower
Answer: B
Explanation: A)
B)
C)
D)
E)

The table below shows aggregate values for a hypothetical economy. Suppose that this economy has real GDP equal to potential output.

Potential GDP $2500

Net Tax Revenues $50
Government Purchases $200
Investment $100
Consumption $2350
Net Exports -$135

TABLE 26-1

62) Refer to Table 26-1. What is the level of public saving for this economy? 62)
A) $200 B) -$200 C) -$50 D) $150 E) -$150
Answer: E
Explanation: A)
B)
C)
D)
E)

63) In the Neoclassical growth model, the law of diminishing marginal returns implies that capital 63)
accumulation leads to ever
A) larger decreases in GDP and large decreases in living standards.
B) smaller increases in GDP and living standards.
C) larger levels of unemployment but larger increases in the standard of living.
D) larger levels of unemployment but small increases in the standard of living.
E) larger increases in GDP but smaller decreases in living standards.
Answer: B
Explanation: A)
B)
C)
D)
E)

28
The diagram below show the market for loanable funds assuming that national income is constant at Y*.

FIGURE 26-2

64) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is 64)
reflected by I0 D. If the real interest rate is i 4 , there is ________, which will drive the real interest
rate up to i*.
A) an excess demand for public saving
B) an excess supply of loanable funds
C) an excess supply of financial capital
D) an excess supply of saving
E) an excess demand for loanable funds
Answer: E
Explanation: A)
B)
C)
D)
E)

65) If the government has a budget deficit of $400 and the country's level of national saving is $200, 65)
then private saving must be
A) $600. B) -$400. C) $800. D) $400. E) $200.
Answer: A
Explanation: A)
B)
C)
D)
E)

29
66) An important social cost of economic growth is 66)
A) the increasing inequality of income that usually accompanies sustained growth.
B) the sacrifice of current consumption required for a higher level of future consumption.
C) the destruction of jobs due to labour skills of certain workers becoming obsolete.
D) the associated inflation.
E) the associated frictional unemployment.
Answer: C
Explanation: A)
B)
C)
D)
E)

67) The four fundamental determinants of economic growth include all of the following EXCEPT: 67)
A) growth in financial capital
B) growth in the labour force
C) growth in physical capital
D) growth in human capital
E) technological improvement
Answer: A
Explanation: A)
B)
C)
D)
E)

68) If per capita GDP in a richer country grows at a faster annual rate than in a poorer country, 68)
A) the gap between their standards of living will close over time as long as the rate of population
growth is higher in the poorer country.
B) the gap between their standards of living will close over time.
C) whether the gap in living standards widens or closes over time depends on the absolute size
of the relative growth rates.
D) the gap between their standards of living will widen over time.
E) the difference in their living standards will not change over time.
Answer: D
Explanation: A)
B)
C)
D)
E)

30
69) An aggregate production function exhibits increasing returns to capital when 69)
A) a one percent decrease in capital produces an increase in the marginal product of capital.
B) each additional unit of capital increases the number of jobs by more than one percent.
C) a one percent increase in capital produces no change in output.
D) no change in capital produces a one percent increase in output.
E) each additional unit of capital has a higher marginal product than the previous unit.
Answer: E
Explanation: A)
B)
C)
D)
E)

70) The "new" theories of economic growth emphasize that the pace of technological change is 70)
________ to economic signals, and that it is ________ to the economic system.
A) unresponsive; exogenous
B) unresponsive; endogenous
C) responsive; exogenous
D) responsive; endogenous
E) unresponsive; unrelated
Answer: D
Explanation: A)
B)
C)
D)
E)

71) The main properties of a Neoclassical aggregate production function are ________ and ________. 71)
A) decreasing returns to scale; diminishing marginal returns
B) increasing returns to scale; diminishing marginal returns
C) constant returns to scale; diminishing marginal returns
D) increasing returns to scale; increasing marginal returns
E) constant returns to scale; constant marginal returns
Answer: C
Explanation: A)
B)
C)
D)
E)

31
72) In Neoclassical growth theory, increasing the amount of capital employed in production ________ 72)
the average standard of living as long as the marginal product of capital exceeds zero.
A) at first reduces but eventually raises
B) at first raises but eventually reduces
C) has no effect on
D) unambiguously reduces
E) unambiguously raises
Answer: E
Explanation: A)
B)
C)
D)
E)

73) A person who returns to school to improve her computer skills is an example of an increase in 73)
A) technological capital.
B) the labour force.
C) physical capital.
D) human capital.
E) financial capital.
Answer: D
Explanation: A)
B)
C)
D)
E)

32
The diagram below shows the market for loanable funds in the long run.

FIGURE 26-3

74) Refer to Figure 26-3. Suppose the interest rate in this market for loanable funds is 4 percent. In this 74)
case there is an excess ________ loanable funds of ________ billion dollars.
A) demand for; -60
B) demand for; 30
C) supply of; 90
D) demand for; 60
E) supply of; 30
Answer: E
Explanation: A)
B)
C)
D)
E)

33
75) If GDP in a richer country grows at the same annual rate as in a poorer country, the 75)
A) gap between their standards of living will widen over time.
B) difference in their living standards will not change over time.
C) gap between their standards of living will close over time.
D) gap between their standards of living will close over time as long as the rate of population
growth is lower in the richer country.
E) gap between their standards of living will close over time as long as the rate of population
growth is lower in the poorer country.
Answer: E
Explanation: A)
B)
C)
D)
E)

76) One important assumption of the Neoclassical growth model is that, with a given state of 76)
technology,
A) increases in the use of a single factor result in constant returns.
B) increases in the use of single factor bring diminishing returns.
C) the return from successive units of a single factor increases over time.
D) increases in GDP are possible only if all factors are increased at an equal rate.
E) increases in the use of a single factor bring increasing returns.
Answer: B
Explanation: A)
B)
C)
D)
E)

77) In the Neoclassical growth model, whenever diminishing returns applies, increases in the 77)
population, other things being equal, are accompanied by
A) increasing GDP and constant living standards.
B) increasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) decreasing GDP and increasing living standards.
E) decreasing GDP and falling living standards.
Answer: C
Explanation: A)
B)
C)
D)
E)

34
78) In new theories of "endogenous growth", increasing marginal returns to investment can occur 78)
because
A) early investors create an infrastructure favorable to followers.
B) many investments require large fixed costs, the benefits of which are not available to
subsequent firms.
C) little risk is associated with the process of innovation for technological followers
D) investment costs for followers can be higher than for pioneers.
E) knowledge provides the input that allows investment to be profitable.
Answer: A
Explanation: A)
B)
C)
D)
E)

79) In the Neoclassical growth model, increases in the stock of physical capital, other things being 79)
equal, will lead to
A) increasing GDP and increasing living standards.
B) increasing GDP and falling living standards.
C) increasing GDP and decreased national wealth.
D) decreasing GDP and increasing living standards.
E) decreasing GDP and falling living standards.
Answer: A
Explanation: A)
B)
C)
D)
E)

35
The diagram below shows the market for loanable funds in the long run.

FIGURE 26-3

80) Refer to Figure 26-3. The equilibrium interest rate in this market is ________ percent and the 80)
equilibrium flow of investment and saving is ________ billion dollars.
A) 4 ; 80 B) 3 ; 70 C) 5 ; 90 D) 1 ; 50 E) 2 ; 60
Answer: B
Explanation: A)
B)
C)
D)
E)

81) Data from most industrialized countries show that countries with high investment rates (as a 81)
percentage of GDP) tend to be countries
A) with a negative relationship between investment and the rate of economic growth.
B) with high rates of economic growth.
C) with the highest levels of per capita GDP.
D) with the lowest rate of national saving.
E) with the highest levels of GDP.
Answer: B
Explanation: A)
B)
C)
D)
E)

36
82) The theory of economic growth concentrates on the ________ over the long run, not on ________. 82)
A) factor utilization rates; growth of real GDP
B) growth of investment in capital goods; short-run fluctuations of investment
C) factor utilization rates; growth of the supplies of factors
D) growth of potential output; fluctuations of output around potential
E) growth of real GDP; growth of potential GDP
Answer: D
Explanation: A)
B)
C)
D)
E)

83) For a given level of private saving, an increase in the growth of government purchases will likely 83)
________ the economy's long-run growth rate.
A) slow down
B) increase
C) not affect
D) accelerate
E) --not enough information to know
Answer: A
Explanation: A)
B)
C)
D)
E)

84) An aggregate production function exhibits constant returns to scale when a one percent increase in 84)
labour input
A) along with a one percent decrease in capital produces the same amount of output.
B) along with a one percent increase in capital produces the same amount of output.
C) produces a one percent increase in output.
D) along with a one percent increase in capital produces one percent more output.
E) induces a one percent increase in capital input.
Answer: D
Explanation: A)
B)
C)
D)
E)

37
85) The compounding of economic growth rates means that 85)
A) consumers should not save, given the low real returns that compounding produces.
B) a large increase in investment today has little effect on national income over the long run.
C) a 10 percent annual rate of return will double an investment in less than 6 years.
D) a 2 percent annual growth rate of GDP will double national income in 27 years.
E) small changes in sustained growth rates can have a significant impact on national income
over several decades.
Answer: E
Explanation: A)
B)
C)
D)
E)

86) In the Neoclassical growth model, decreases in the population, other things being equal, would 86)
eventually result in
A) decreasing GDP and falling living standards.
B) increasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) decreasing GDP and increasing living standards.
E) increasing savings and increasing living standards.
Answer: D
Explanation: A)
B)
C)
D)
E)

38
The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is
equal to Area 2.

FIGURE 26-1

87) Refer to Figure 26-1. Which of the following statements best describes what we know about the 87)
difference between the two economies at Year 0?
A) There is no opportunity cost for economic growth for Economy B at Year 0.
B) Economy B's households are consuming a larger percentage of GDP than Economy A's
households.
C) Economy A has a higher level of real GDP at Year 0 than Economy B.
D) There is no opportunity cost of economic growth for Economy A at Year 0.
E) Economy A's households are consuming a larger percentage of GDP than Economy B's
households.
Answer: E
Explanation: A)
B)
C)
D)
E)

88) The Neoclassical theory of economic growth led economics to be referred to as the "dismal science". 88)
The explanation for this reference lies in the theory's emphasis on
A) increasing government intervention in the economy.
B) diminishing returns in production.
C) the immoral behaviour of firms.
D) increasing damage to the environment.
E) growing inequality of income.
Answer: B
Explanation: A)
B)
C)
D)
E)

39
89) One of the benefits of long-run economic growth is 89)
A) decreased current saving and increased current consumption.
B) increased future interest rates.
C) decreased productive capacity.
D) a greater ability to reduce inequality.
E) growth in nominal GDP greater than real GDP.
Answer: D
Explanation: A)
B)
C)
D)
E)

90) For a given level of private saving, a decrease in the government's budget deficit ________ the 90)
long-run rate of economic growth.
A) will diminish
B) will reduce
C) will increase
D) will leave unchanged
E) none of the above
Answer: C
Explanation: A)
B)
C)
D)
E)

91) Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns 91)
to labour. If the amount of capital is held constant and the amount of labour used in production is
increasing, then
A) there are constant returns to scale.
B) each additional unit of labour will add more to total output than the previous unit of labour.
C) there are increasing returns to scale.
D) each additional unit of labour will add less to total output than the previous unit of labour.
E) total output increases in proportion to the increases in labour.
Answer: D
Explanation: A)
B)
C)
D)
E)

40
 92) Of the variables listed below, the best measure of a nation's average material standard of living is 92)
A) percent change in nominal GDP.
B) per capita real GDP.
C) nominal GDP.
D) real GDP.
E) per capita nominal GDP.
Answer: B
Explanation: A)
B)
C)
D)
E)

The diagram below show the market for loanable funds assuming that national income is constant at Y*.

FIGURE 26-2

93) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is 93)
reflected by I0 D. Now suppose there is a reduction in government purchases (G). What is the effect
on the equilibrium real interest rate?
A) There is no effect on NS or ID, and the interest rate remains at i*.
B) The real interest rate rises because of the decrease in the budget surplus.
C) National saving shifts to NS1 and the interest rate falls to i 3 .
D) Investment demand shifts to I1 D, and the interest rate rises to i 2 .
E) The real interest rate falls because of the decrease in the budget surplus.
Answer: C
Explanation: A)
B)
C)
D)
E)

41
 94) In the long run, changes in average material living standards are best shown by 94)
A) growth in real per capita GDP.
B) population growth.
C) improvements in fiscal policy.
D) improvements in monetary policy.
E) growth in real GDP.
Answer: A
Explanation: A)
B)
C)
D)
E)

The diagram below show the market for loanable funds assuming that national income is constant at Y*.

FIGURE 26-2

95) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is 95)
reflected by I0 D. If the real interest rate is i 1 , there is ________ which will drive the interest rate
down until it reaches i*.
A) an excess supply of loanable funds
B) an excess demand for loanable funds
C) an excess supply of public saving
D) an excess demand for investment
E) an excess demand for financial capital
Answer: A
Explanation: A)
B)
C)
D)
E)

42
96) The aggregate production function shows the ________ for given levels of labour and capital 96)
inputs.
A) returns to scale
B) the production possibilities boundary
C) marginal product of capital
D) marginal product of labour
E) total output for society (real GDP)
Answer: E
Explanation: A)
B)
C)
D)
E)

97) Consider the market for loanable funds in the long run. The investment demand curve is 97)
downward sloping because
A) a decrease in the real interest rate reflects a higher opportunity cost to firms of using loanable
funds.
B) all components of desired investment are negatively related to the real interest rate.
C) an increase in the real interest rate leads to an increase in investment demand.
D) an increase in the real interest rate reflects a lower opportunity cost to firms of using loanable
funds.
E) all components of desired investment are positively related to the real interest rate.
Answer: B
Explanation: A)
B)
C)
D)
E)

98) The so-called "Solow residual" 98)

A) is an underestimate of the amount of technological change when embodied technological
progress occurs.
B) is an overestimate of the amount of technological change when embodied technological
progress occurs.
C) takes embodied technological change into consideration.
D) refers to the amount of GDP growth that cannot be explained by the growth in technological
change.
E) is an alternative to a measure of "total factor productivity".
Answer: A
Explanation: A)
B)
C)
D)
E)

43
 99) According to the Neoclassical growth theory, sustained rising material living standards can only be 99)
explained by
A) growth in human capital.
B) growth in physical capital.
C) exogenous technological change.
D) balanced growth of labour and capital.
E) growth in the labour force.
Answer: C
Explanation: A)
B)
C)
D)
E)

100) In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe 100)
A) increasing living standards but only for workers using capital-intensive production.
B) increasing living standards but only for workers using labour-intensive production.
C) rising GDP but falling living standards.
D) rising GDP and increasing living standards.
E) rising GDP but no change in living standards.
Answer: E
Explanation: A)
B)
C)
D)
E)

101) A central assumption of the Neoclassical growth model is that 101)

A) there are diminishing marginal returns to a single factor.
B) long-run growth arises from correcting market failures.
C) there are increasing marginal returns to capital investment.
D) long-run growth arises only from technological innovation.
E) there are constant marginal returns to investment.
Answer: A
Explanation: A)
B)
C)
D)
E)

44
102) According to some modern theories of long-run economic growth, successive increments of 102)
investment have ________ returns since some fixed costs are ________ for subsequent firms.
A) constant; identical
B) decreasing; lower
C) increasing; higher
D) increasing; lower
E) decreasing; higher
Answer: D
Explanation: A)
B)
C)
D)
E)

103) Neoclassical growth theory is based on the assumption of ________ marginal returns to a single 103)
factor and ________ returns to scale exhibited by the aggregate production function.
A) decreasing; constant
B) increasing; increasing
C) constant; decreasing
D) decreasing; decreasing
E) increasing; constant
Answer: A
Explanation: A)
B)
C)
D)
E)

104) The growth of "total factor productivity", or the "Solow residual", is equal to the growth in real GDP 104)
A) accounted for by changes in all factors of production and including technological changes.
B) accounted for by changes in all factors of production but excluding technological changes.
C) that cannot be accounted for by changes in the quantities of labour and capital.
D) that cannot be accounted for by changes in the labour force.
E) that cannot be accounted for by changes in technology.
Answer: C
Explanation: A)
B)
C)
D)
E)

45
The table below shows aggregate values for a hypothetical economy. Suppose that this economy has real GDP equal to potential output.

Potential GDP $2500

Net Tax Revenues $50
Government Purchases $200
Investment $100
Consumption $2350
Net Exports -$135

TABLE 26-1

105) Refer to Table 26-1. What is the level of national saving for this economy? 105)
A) -$50 B) $150 C) -$150 D) $200 E) -$200
Answer: A
Explanation: A)
B)
C)
D)
E)

106) Over a long period of time, perhaps many years, changes in real GDP come primarily from 106)
A) continuous increases in potential GDP.
B) leftward shifts of the AD curve.
C) upward shifts of the AS curve.
D) upward shifts of the AE curve.
E) rightward shifts of the AD curve.
Answer: A
Explanation: A)
B)
C)
D)
E)

107) If government policies are to be successful in enhancing a country's long-run growth rate, they 107)
likely work through generating
A) fiscal policies that shift the AD curve to the right.
B) an increase in current consumption and a reduction in saving.
C) greater private investment in physical and human capital.
D) higher levels of current consumption.
E) a leftward shift in the AS curve.
Answer: C
Explanation: A)
B)
C)
D)
E)

46
108) Long-term economic growth 108)
A) alleviates all poverty.
B) is the result of expansionary fiscal policy.
C) leads to equal income distribution.
D) is achieved only by changes in factor-utilization rates.
E) improves average material living standards.
Answer: E
Explanation: A)
B)
C)
D)
E)

109) A common measure of a country's level of productivity is 109)

A) output per capita.
B) per capita GDP.
C) the capital-output ratio.
D) the average efficiency of capital.
E) output per unit of labour input.
Answer: E
Explanation: A)
B)
C)
D)
E)

110) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5 110)
percent each, and the production function displays constant returns to scale, then total output will
increase by ________ percent.
A) 5
B) more than 5
C) less than 5
D) 0
E) --not enough information to determine
Answer: A
Explanation: A)
B)
C)
D)
E)

47
111) With respect to long-run economic growth, one rationale for the idea that there may be increasing 111)
marginal returns to investment is that
A) as further investment takes place the economy moves down to the right along the marginal
product schedule.
B) as further investment takes place the economy moves upward to the left along the marginal
product schedule.
C) initial investment shifts the the investment demand schedule to the left, making further
investment less costly.
D) the investment costs to "followers" are lower than those for "pioneers".
E) initial investment shifts the the aggregate demand schedule to the left, making further
investment less costly.
Answer: D
Explanation: A)
B)
C)
D)
E)

112) Consider the market for loanable funds for a closed economy in the long run. Other things being 112)
equal, a country with a high national saving rate will tend to have
A) trouble achieving potential real national income in the short run.
B) either a high or low growth rate depending on the investment demand schedule.
C) a high growth rate because aggregate expenditure will be high out of any given income.
D) an AS curve moving continually to the left.
E) a high growth rate because sustained high investment is possible with high saving.
Answer: E
Explanation: A)
B)
C)
D)
E)

113) When a new personal computer is purchased to replace an old one, and the new PC is much better 113)
and faster than the old one, there has been
A) an embodied technical change.
B) a disembodied technical change.
C) a fall in the output per unit of capital.
D) capital "deepening".
E) a rise in the capital-output ratio.
Answer: A
Explanation: A)
B)
C)
D)
E)

48
114) If real income grows at approximately 4 percent per year, the number of years it will take for real 114)
income to double is approximately
A) 5. B) 12. C) 18. D) 36. E) 72.
Answer: C
Explanation: A)
B)
C)
D)
E)

115) For a given level of national income, a decrease in private consumption or government purchases 115)
will cause the equilibrium interest rate to
A) increase and the flow of national saving to fall.
B) increase and the flow of investment to decrease.
C) decrease and the flow of investment to decrease.
D) decrease and the flow of investment to increase.
E) increase and the flow of investment to increase.
Answer: D
Explanation: A)
B)
C)
D)
E)

49
Answer Key
Testname: C26

1) A
2) A
3) B
4) D
5) C
6) C
7) B
8) B
9) A
10) E
11) B
12) C
13) C
14) A
15) A
16) A
17) E
18) C
19) A
20) C
21) B
22) A
23) E
24) B
25) C
26) C
27) B
28) E
29) B
30) B
31) A
32) C
33) E
34) B
35) D
36) B
37) A
38) E
39) B
40) E
41) A
42) B
43) D
44) E
45) D
46) D
47) D
48) D
49) B
50) C
50
Answer Key
Testname: C26

51) E
52) B
53) C
54) C
55) D
56) E
57) E
58) C
59) E
60) B
61) B
62) E
63) B
64) E
65) A
66) C
67) A
68) D
69) E
70) D
71) C
72) E
73) D
74) E
75) E
76) B
77) C
78) A
79) A
80) B
81) B
82) D
83) A
84) D
85) E
86) D
87) E
88) B
89) D
90) C
91) D
92) B
93) C
94) A
95) A
96) E
97) B
98) A
99) C
100) E
51
Answer Key
Testname: C26

101) A
102) D
103) A
104) C
105) A
106) A
107) C
108) E
109) E
110) A
111) D
112) E
113) A
114) C
115) D

52
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