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CHAPTER11.SAVING,CAPITALACCUMULATION,ANDOUTPUT

MULTIPLECHOICEQUESTIONS

M 1.Anincreaseinthesavingratewillaffectwhichofthefollowingvariablesinthelongrun?

a.outputperworker.

b.capitalperworker.

c.thelevelofinvestment.

d.alloftheabove.

M 2.AreductioninthesavingratewillNOTaffectwhichofthefollowingvariablesinthelongrun?

a.outputperworker.

b.thegrowthrateofoutputperworker.

c.theamountofcapitalintheeconomy.

d.capitalperworker.

e.noneoftheabove

M 3.Whichofthefollowingwillcauseanincreaseinoutputperworkerinthelongrun?

a.anincreaseinthesavingrate.

b.areductioninthedepreciationrate.

c.anincreaseinthestockofhumancapital.

d.alloftheabove.

E 4.Whichofthefollowingstatementsisalwaystrue?

a.Investmentequalsdepreciation.

b.Investmentequalsthecapitalstockminusdepreciation.

c.Thecapitalstockisequaltoinvestmentminusdepreciation.

d.Anychangeinthecapitalstockisequaltoinvestmentminusdepreciation.

e.Theincreaseininvestmentisequaltothecapitalstockminusdepreciation.

E 5.WhichofthefollowingisNOTaflowvariable?

a.investment.

b.saving.

c.themoneysupply.

d.output.

e.alloftheabove.

M 6.Thecapital-laborratiowilltendtodecreaseovertimewhen

a.investmentperworkerequalssavingperworker.

b.investmentperworkerislessthansavingperworker.

c.investmentperworkerexceedsdepreciationperworker.

d.savingperworkerequalsdepreciationperworker.

e.outputperworkerexceedscapitalperworker.

M 7.Intheabsenceoftechnologicalprogress,whichofthefollowingremainsconstantinthesteadystateequilibrium?

a.Investmentperworker.

b.Outputperworker.

c.Savingperworker.

d.alloftheabove.

e.onlyaandb.

M 8.Suppose,duetotheeffectsofamilitaryconflictthathasended,thatacountryexperiencesalargereductioninitscapitalstock.Assumenoothereffectsofthiseventontheeconomy.Whichofthefollowingwilltendtooccurastheeconomyadjuststothissituation?

a.arelativelylowgrowthrateforsometime.

b.arelativehighgrowthrateforsometime.

c.zerogrowthforsometime,followedbyagraduallyincreasinggrowthrate.

d.positivegrowth,followedbynegativegrowth,andthenzerogrowth.

e.noneoftheabove.

M 9.Forthisquestionassumethattechnologicalprogressdoesnotoccur.TherateofsavinginCanadahasgenerallybeengreaterthanthesavingrateintheU.S.Giventhisinformation,weknowthatinthelongrun:

a.Canada’sgrowthratewillbegreaterthantheU.S.growthrate.

b.investmentperworkerinCanadawillbenodifferentthanU.S.investmentperworker.

c.capitalperworkerinCanadawillbenodifferentthanU.S.capitalperworker.

d.alloftheabove.

e.noneoftheabove.

M 10.Whenaneconomyisoperatingatthesteadystate,weknowthat

a.steadystatesavingequalsconsumption.

b.steadystatesavingislessthantotalconsumption.

c.steadystatesavingisequaltodepreciationperworker.

d.steadystatesavingexceedsdepreciationeachyearbyaconstantamount.

e.noneoftheabove.

M 11.Intheabsenceoftechnologicalprogress,whichofthefollowingistruewhentheeconomyisoperatingatthesteadystate?

a.thegrowthofoutputperworkeriszero.

b.thegrowthofoutputperworkerisequaltothesavingrate.

c.thegrowthofoutputperworkerisequaltotherateofinvestment.

d.thegrowthofoutputperworkerisequaltotherateofdepreciation.

e.noneoftheabove.

M 12.Intheabsenceoftechnologicalprogress,anincreaseinthesavingratewillcausewhichofthefollowing?

a.increasetemporarilythegrowthofoutputperworker.

b.increasethesteadystategrowthofoutputperworker.

c.decreasetemporarilythegrowthofoutputperworker.

d.decreasethesteadystategrowthofoutputperworker.

e.haveanambiguouseffectonthegrowthofoutputperworker.

D 13.Intheabsenceoftechnologicalprogress,weknowwithcertaintythatanincreaseinthesavingratewillcausewhichofthefollowing?

a.increasesteadystateconsumption.

b.decreasesteadystateconsumption.

c.havenoeffectonsteadystateconsumption.

d.increasesteadystateconsumptiononlyiftheincreaseinsavingexceedstheincreaseindepreciation.

e.increasesteadystateconsumptiononlyiftheincreaseinsavingislessthantheincreaseindepreciation.

E 14.Intheabsenceoftechnologicalprogress,weknowthatthelevelofoutputperworkerinthesteadystatewill:

a.increaseovertime.

b.remainconstant.

c.decreaseasaresultofdecreasingreturnstoscale.

d.increaseordecrease,dependingontherateofsaving.

e.increaseordecrease,dependingontherateofdepreciation.

M 15.Asaneconomyadjuststoanincreaseinthesavingrate,wewouldexpectoutputperworker:

a.toincreaseataconstantrateandcontinueincreasingatthatrateinthesteadystate.

b.toincreaseatapermanentlyhigherrate.

c.todecreaseatapermanentlyhigherrate.

d.toreturntoitsoriginallevel.

e.noneoftheabove.

E 16.Ourmodeloflong-runeconomicgrowthsuggeststhat

a.theU.S.growthslowdownsince1950hasbeencausedlargelybylowsavingintheU.S.

b.ahigherrateofsavingintheU.S.cannotdomuchtoincreasetheU.S.growthrateoverthenexttwodecades.

c.savingintheU.S.hasexceededthegolden-rulelevel.

d.alloftheabove.

e.noneoftheabove.

E 17.TheSocialSecuritysystemintheUnitedStateswasintroducedinwhichyear?

a.1915

b.1935

c.1945

d.1955

e.noneoftheabove

M 18.Supposethereisanincreaseinthesavingrate.Thisincreaseinthesavingratemustcauseanincreaseinconsumptionpercapitainthelongrunwhen:

a.capitalperworkerapproachesthegolden-rulelevelofcapitalperworker.

b.thesavingisusedforeducationratherthanphysicalcapital.

c.therateofsavingexceedstherateofdepreciation.

d.thereisnotechnologicalprogress.

e.technologicalprogressdependsonhumancapital.

M 19.Whensteadystatecapitalperworkerisabovethegolden-rulelevel,weknowwithcertaintythatanincreaseinthesavingratewill

a.increaseconsumptioninboththeshortrunandthelongrun.

b.decreaseconsumptioninboththeshortrunandthelongrun.

c.decreaseconsumptionintheshortrun,andincreaseitinthelongrun.

d.increaseconsumptionintheshortrun,anddecreaseitinthelongrun.

e.noneoftheabove.

M 20.Supposetwocountriesareidenticalineverywaywiththefollowingexception.EconomyAhasahighersavingratethaneconomyB.Giventhisinformation,weknowwithcertaintythat:

a.steadystateconsumptioninAishigherthaninB

b.steadystateconsumptioninAislowerthaninB

c.steadystateconsumptioninAandinBareequal

d.steadystategrowthofoutputperworkerishigherinAthaninB

e. noneoftheabove

D 21.Supposetwocountriesareidenticalineverywaywiththefollowingexception.EconomyAhasagreaterquantityofhumancapitalthaneconomyB.Giventhisinformation,weknowwithcertaintythat:

a.steadystateconsumptioninAishigherthaninB

b.steadystateconsumptioninAislowerthaninB

c.steadystateconsumptioninAandinBareequal

d.steadystategrowthofoutputperworkerishigherinAthaninB

D 22.Supposetwocountriesareidenticalineverywaywiththefollowingexception.EconomyAhasahigherrateofdepreciation()thaneconomyB.Giventhisinformation,weknowwithcertaintythat:

a.steadystateconsumptioninAishigherthaninB

b.steadystateconsumptioninAislowerthaninB

c.steadystateconsumptioninAandinBareequal

d.steadystategrowthofoutputperworkerishigherinAthaninB

e. noneoftheabove

E 23.Thecountrieswiththelowestoutputpercapita

a.arerichwithhumancapital,buthavelittlephysicalcapital.

b.arerichwithphysicalcapital,buthavelittlehumancapital.

c.arepoorinbothhumanandphysicalcapital.

d.havelowlivingstandardsinspiteofrelativelyhighlevelsofbothhumanandphysicalcapital.

e.mayormaynotbepoorinhumancapital,dependingonwhethertheexchangerateorpurchasingpowerparitymethodisusedforcomparison.

E 24.Whichofthefollowingarereasonstosuspectspendingoneducationmightoverestimatehumancapitalinvestment?

a.Educationspendingleavesoutforegonewages.

b.Partoftotalspendingoneducationisreallyconsumption.

c.Muchhumancapitalinvestmentcomesfromon-the-jobtraining.

d.Alloftheabove.

e.Noneoftheabove.

M 25.Ifendogenousgrowthmodelsarecorrect,alowerrateofgrowthinthelongruncouldoccurasaresultofwhichofthefollowing?

a.alowerrateofsaving.

b.alowerrateofdepreciation.

c.aredefinitionofdepreciation.

d.aredefinitionofthesteadystate.

e.noneoftheabove.

M 26.Supposethefollowingsituationexistsforaneconomy:Kt+1/N>Kt/N.Giventhisinformation,weknowthat:

a.savingperworkerequalsdepreciationperworkerinperiodt

b.savingperworkerislessthandepreciationperworkerinperiodt

c.savingperworkerisgreaterthandepreciationperworkerinperiodt

d.thesavingratefellinperiodt

e.noneoftheabove

M 27.Supposethefollowingsituationexistsforaneconomy:Kt+1/N=Kt/N.Giventhisinformation,weknowthat:

a.savingperworkerequalsdepreciationperworkerinperiodt

b.savingperworkerislessthandepreciationperworkerinperiodt

c.savingperworkerisgreaterthandepreciationperworkerinperiodt

d.thesavingratefellinperiodt

e.steadystateconsumptionisequaltothegoldenrulelevelofsteadystateconsumption

M 28.Atthecurrentsteadystatecapital-laborratio,assumethatthesteadystatelevelofpercapitaconsumption,(C/N)*,islessthanthegoldenrulelevelofsteadystatepercapitaconsumption.Giventhisinformation,wecanbecertainthat:

a.anincreaseinthesavingratewillcauseanincreaseinthesteadystatelevelofpercapitaconsumption ((C/N)*)

b.areductioninthecapital-laborratiowillcauseareductionin(C/N)*

c.thecapitallaborratiowilltendtoincreaseovertime

d.thecapitallaborratiowilltendtodecreaseovertime

e.areductioninthesavingratewillhaveanambiguouseffecton(C/N)*

M 29.Supposethefollowingsituationexistsforaneconomy:Kt+1/N<Kt/N.Giventhisinformation,weknowthat:

a.savingperworkerequalsdepreciationperworkerinperiodt

b.consumptionperworkerwilltendtofallastheeconomyadjuststothissituation

c.savingperworkerisgreaterthandepreciationperworkerinperiodt

d.thesavingrateincreasedinperiodt

e.noneoftheabove

E 30.Thegoldenrulelevelofcapitalrefersto:

a.thelevelofcapitalthatmaximizesoutputperworker

b.thelevelofcapitalthatmaximizesthestandardofliving

c.thelevelofcapitalthatmaximizesconsumptionperworkerinthesteadystate

d.alloftheabove

e.noneoftheabove

M 31.Supposethefollowingsituationexistsforaneconomy:Kt+1/N=Kt/N.Giventhisinformation,weknow withcertaintythat:

a.theeconomyisoperatingatthegoldenruleequilibriuminperiodt

b.savingperworkerislessthandepreciationperworkerinperiodt

c.savingperworkerisgreaterthandepreciationperworkerinperiodt

d.investmentperworkerequalsdepreciationperworkerinperiodt

M 32.Supposethesavingrateisinitiallylessthanthegoldenrulesavingrate.Weknowwithcertaintythata reductioninthesavingratewillcause:

a.areductioninthecapitallaborratio

b.areductioninoutputperworker

c.areductioninconsumptionperworker

d.alloftheabove

e.noneoftheabove

M 33.Supposethesavingrateisinitiallygreaterthanthegoldenrulesavingrate.Weknowwithcertaintythat areductioninthesavingratewillcause:

a.areductionintherateofgrowthinthelongrun

b.areductioninoutputperworker

c.areductioninconsumptionperworker

d.alloftheabove

e.noneoftheabove

M 34.Supposethesavingrateisinitiallygreaterthanthegoldenrulesavingrate.Weknowwithcertaintythat anincreaseinthesavingratewillcause:

a.anincreaseintherateofgrowthinthelongrun

b.areductioninoutputperworker

c.areductioninconsumptionperworker

d.alloftheabove

e.noneoftheabove

E 35.Whichofthefollowingrepresentsthechangeinthecapitalstock?

a.consumptionminusdepreciation

b.outputminusdepreciation

c.investmentminussaving

d.investmentminusdepreciation

E 36.Whentheeconomyisinthesteadystate,weknowwithcertaintythat:

a.investmentperworkerisequaltodepreciationperworker

b.consumptionperworkerismaximized

c.outputperworkerismaximized

d.thegrowthrateismaximized

e.alloftheabove

E 37.Whichofthefollowingrepresentstheeffectsinperiodtofanincreaseinthesavingrateinperiodt?

a.nochangeinK/N

b.nochangeinY/N

c.areductioninC/N

d.alloftheabove

M 38.Ifthesavingrateis1(i.e.,s=1),weknowthat:

a.K/Nwillbeatitshighestlevel

b.Y/Nwillbeatitshighestlevel

c.C/N=0

d.alloftheabove

M 39.Supposeaneconomyexperiencesa5%increaseinhumancapital.Weknowthatthiswillcause:

a.Y/Ntoincreasebymorethan5%

b.Y/Ntoincreasebyexactly5%

c.Y/Ntoincreasebylessthan5%

d.nochangeinY/N

e.areductioninoutputperworker

M 40.Supposeaneconomyexperiencea4%increaseineachofthefollowingvariables:N,K,andH(human capital).Giventhisinformation,weknowwithcertaintythat:

a.Ywillincreasebymorethan4%

b.Ywillincreasebyexactly4%

c.Ywillincreasebylessthan4%

d.Ywillincreasebylessthan12%butbymorethan4%

e.noneoftheabove

M 41.Supposetherearetwocountriesthatareidenticalineverywaywiththefollowingexception:CountryA hasahighersavingratethancountryB.Giventhisinformation,weknowwithcertaintythat:

a.thegrowthratewillbehigherinAthaninB

b.thegrowthratewillbethesameinthetwocountries

c.thelevelofconsumptionperworkerwillbehigherinA

d.thelevelofconsumptionperworkerwillbehigherinB

M 42.Supposetherearetwocountriesthatareidenticalineverywaywiththefollowingexception:CountryA hasahigherstockofhumancapitalthancountryB.Giventhisinformation,weknowwithcertaintythat:

a.thegrowthratewillbehigherinAthaninB

b.thegrowthratewillbethesameinthetwocountries

c.outputperworkerwillbethesameinthetwocountries

d.K/NwillbehigherinB

M 43.Supposetherearetwocountriesthatareidenticalineverywaywiththefollowingexception:CountryA hasalowerdepreciationrate()thancountryB.Giventhisinformation,weknowwithcertaintythat:

a.thegrowthratewillbethesameinthetwocountries

b.thegrowthratewillbehigherinAthaninB

c.K/NwillbehigherinB

d.Y/NwillbehigherinB

M 44.Supposetheeconomyisinitiallyinthesteadystate.Anincreaseinthedepreciationrate()willcause:

a.areductioninK/N

b.areductioninY/N

c.areductioninC/N

d.alloftheabove

e.noneoftheabove

M 45.Supposetheeconomyisinitiallyinthesteadystate.Areductioninthedepreciationrate()willcause:

a.anincreaseinK/N

b.anincreaseinthegrowthrateinthelongrun

c.areductioninC/N

d.alloftheabove

M 46.Whichofthefollowingwilllikelycauseanincreaseinoutputperworker?

a.anincreaseineducationexpenditures

b.anincreaseinthesavingrate

c.anincreaseinon-the-jobtraining

d.alloftheabove

M 47.Basedonourunderstandingofthemodelpresentedinchapter11,whichofthefollowingwillcausea permanentincreaseingrowth?

a.anincreaseineducationspending

b.anincreaseinthesavingrate

c.anincreaseincapitalaccumulation

d.alloftheabove

e.noneoftheabove

ESSAYQUESTIONS

1.Inthemodelwhereitisassumedthatthestateoftechnologydoesnotchange,whatparametersand/orvariablescausechangesinsteadystateoutputperworker.

2.Explaintherelationshipamongoutput,saving,andinvestment.

3.Explainwhatconditionmustoccurforeachofthefollowingtooccur:(1)thecapitalstocktoincrease;(2)thecapitalstocktodecrease;and(3)thecapitalstocktoremainconstant.

4.Supposedepreciationperworkerislessthansavingperworker.Giventhissituation,explainwhatwillhappentoeachofthefollowingvariablesovertime:capitalperworker,outputperworker,savingperworker,andconsumptionperworker.

5.Foraneconomyinwhichthereisnotechnologicalprogress,explainwhatmustoccurforthesteadystatetooccur.Alsoexplainwhatthisimpliesabouttherateofgrowthofoutput,outputperworker,andthecapitalstock.

6.Supposethereisanincreaseinthesavingrate.Explainwhateffectthiswillhaveonoutput,outputperworker,therateofgrowthofoutput,andtherateofgrowthofoutputperworker.

7.Duringthelatterhalfofthe1990s,theU.S.savingratedecreased.Willthisreductioninthesavingratehaveapermanenteffectontherateofgrowthofoutputperworker?Explain.

8.GraphicallyillustrateandexplaintheeffectsofanincreaseinthesavingrateontheSolowgrowthmodel.Inyourgraph,clearlylabelallcurvesandequilibria.

9.Graphicallyillustrateandexplaintheeffectsofanincreaseintherateofdepreciation()ontheSolowgrowthmodel.Inyourgraph,clearlylabelallcurvesandequilibria.

10.Supposepolicymakerswishtoincreasesteadystateconsumptionperworker.Explainwhatmusthappentothesavingratetoachievethisobjective.

11.Supposethesavingrateisgreaterthanthegoldenrulesavingrate(sG).First,explainwhatmusthappentothesavingrateinordertoincreasesteadystateconsumption.Second,whataretheadvantagesanddisadvantagesofthispolicytoincreasesteadystateconsumption.

12.Explainwhathumancapitalisanddiscusshowchangesinhumancapitalcanaffectoutputperworker.

ANSWERSTOMULTIPLECHOICEQUESTIONS

1.d

2.b

3.d

4.d

5.d

6.b

7.d

8.b

9.e

10.c

11.a

12.a

13.e

14.b

15.e

16.e

17.b

18.a

19.b

20.e

21.a

22.b

23.c

24.b

25.a

26.c

27.a

28.e

29.e

30.e

31.d

32.d

33.b

34.c

35.d

36.a

37.d

38.d

39.c

40.d

41.b

42.b

43.a

44.d

45.a

46.d

47.e

ANSWERSTOESSAYQUESTIONS

1.Ingeneral,outputperworkerwilldependonthecapital-laborratio.Theequilibriumcapital-laborratiowilldependonthesavingrateandontherateofdepreciation.Outputwillalsodependontheamountofhumancapitalperworker.So,changesins,,andHwillcausechangesinoutputperworker.

2.Thelevelofoutput(perworker)willdependonthecapital-laborratio.Theamountofcapitalwilldependoninvestment(anddepreciation).Investmentwill,inturn,dependontheamountofsaving.Changesinsavingwillcausechangesininvestment,capital,and,therefore,output.

3.Theequationforthechangeinthecapitalstock(perworker)isgivenbythefollowing:(Kt+1/N)-(Kt/N)=s(Yt/N)-(Kt/N).Thecapitalstockwillnotchangewheninvestmentequalsdepreciation.Ifinvestment/savingexceeds(islessthan)depreciation,thecapitalstockwillgrow(decline).

4.Ifdepreciationislessthansaving,itisalsolessthaninvestment.Alternatively,thereisexcessinvestmenttooffsettheamountofcapitalthatwears