Macroeconomics - Chapter 4

Front 1

1. The marginal product of capital may be decreasing because
a) capital depreciates over time
b) each additional machine has fewer workers to operate it
c) new machines embody a different technology than old machines
d) at some point the economy reaches full capacity, beyond which output cannot expand
e) machines are often firm-specific, with little resale value to another firm

Back 1

b) each additional machine has fewer workers to operate it

Front 2

2. For the economy as a whole, the relationship between output and capital is typically
such that
a) the production function is downward-sloping
b) the marginal product curve is downward-sloping
c) output rises at an increasing rate as capital is accumulating
d) the capital stock falls as output rises
e) output is independent of the capital stock

Back 2

b) the marginal product curve is downward-sloping

Front 3

3. Investing in capital is profitable as long as
a) interest rates are higher than the inflation rate
b) the marginal product of capital is not decreasing
c) the marginal product of capital multiplied by the output price is greater than the
price of one more machine
d) the workers required to operate the machine are paid less than the value of the output
produced
e) the economy is not yet operating at full capacity

Back 3

c) the marginal product of capital multiplied by the output price is greater than the
price of one more machine

Front 4

4. If a certain type of machine costs $1500 per year and annually produces output that
sells for $3 per unit according to the production schedule
Machines: 0 1 2 3 4 5 6 7
Output 0 900 1700 2400 3000 3550 4000 4400
then the optimal number of machines of this type is
a) 2
b) 3
c) 4
d) 5
e) 6 or more

Back 4

d) 5

Front 5

5. Which of the following does not directly affect the optimal level of investment?
a) interest rates
b) the cost of capital
c) the marginal product of capital
d) the price of output
e) the price of imports

Back 5

e) the price of imports

Front 6

6. When interest rates rise,
a) investment increases
b) investment declines
c) savings decrease
d) shortages occur in the market for loans e) long run economic growth is encouraged

Back 6

b) investment declines

Front 7

7. Interest rates are most often determined by
a) government mandates called usury laws
b) the value of the U.S. dollar relative to the value of foreign currency
c) a concave production function exhibiting diminishing marginal returns
d) an equilibrium between saving and investing
e) long run shifts in the full capacity level of output

Back 7

d) an equilibrium between saving and investing

Front 8

8. The diminishing marginal product of capital implies
a) that as nations become poorer, the marginal product of capital declines
b) that an extra machine generates less extra output in a country with little capital than in
a country with much capital
c) that additions to the capital stock produce more incremental output in poor
countries than in rich countries
d) that wealthy economies will continue to grow richer while poor countries become
poorer
e) a failure on the part of a nation’s investors to replace depreciated capital equipment

Back 8

c) that additions to the capital stock produce more incremental output in poor
countries than in rich countries

Front 9

9. Convergence refers to
a) the reunification of formerly divided countries such as East and West Germany
b) an equality between a country’s imports and exports
c) an economy reaching a steady state
d) poorer countries growing more rapidly than rich countries
e) agreement between economic historians of different political persuasions

Back 9

d) poorer countries growing more rapidly than rich countries

Front 10

10. Reconstruction in Europe following World War II demonstrates
a) that winning the war stimulated economic growth in the UK
b) the ease with which military production was converted to civilian production
c) the importance of a central planning authority to direct new investment to its most
productive use
d) that small additions to the devastated capital stock could lead to large increases
in output
e) that the marginal product of capital is reduced when the labor force is reduced

Back 10

d) that small additions to the devastated capital stock could lead to large increases
in output

Front 11

11. Technological improvements have larger effects on output
a) when the capital stock is small than when it is large
b) when the capital stock is large than when it is small
c) when the marginal product of capital is rising than when it is falling
d) when the marginal product of capital is falling than when it is rising
e) when the capital stock is privately owned than when it is publicly owned

Back 11

b) when the capital stock is large than when it is small

Front 12

12. With few exceptions, the most important element of long run growth for
industrialized nations is
a) the ability to use the existing capital stock at full capacity
b) finding enough labor to operate the existing capital stock
c) adding incrementally to the existing capital stock
d) enhancing the technology embodied in the capital stock
e) the ability to export additional output to less developed countries

Back 12

d) enhancing the technology embodied in the capital stock

Front 13

13. Long run increases in an economy’s output, achieved without increasing either the
capital stock, total labor hours employed, or other inputs can result from
a) the removal of price floors
b) expansion of the money supply
c) technological progress
d) corporate mergers
e) all of the above

Back 13

c) technological progress

Front 14

14. The best long run growth strategy for mature industrial economies is probably to
a) increase exploration for natural resources
b) expand the labor force
c) engage in research and development
d) invest in a larger stock of capital
e) increase the savings rate

Back 14

c) engage in research and development

Front 15

15. The best long run growth strategy for developing economies is probably
a) the same as for mature industrial economies
b) to increase the rate of population growth
c) to export raw materials and import finished goods
d) to shift resources into research and development of new technologies
e) to increase the capital stock

Back 15

e) to increase the capital stock

Front 16

16. Which of the following gained the most from technological advances in the 1940-
1990 period?
a) Asian nations
b) African nations
c) Latin American nations
d) Middle Eastern nations
e) Developed OECD nations

Back 16

e) Developed OECD nations

Front 17

17. Depreciation in the national income accounts
a) allows for decreases in the international exchange rate of the currency
b) adjusts for the loss of purchasing power due to inflation
c) is an allowance for the capital worn out in production
d) measures the depletion of natural resources
e) adjusts for the time value of money, as measured by the interest rate

Back 17

c) is an allowance for the capital worn out in production

Front 18

18. The difference between “gross” and “net” in the calculation of national income or
domestic product reflects
a) an adjustment for taxes
b) an adjustment for capital depreciation
c) the difference between total output and output produced in the private sector
d) the difference between output in a calendar year and output in a fiscal year
e) the difference between what is produced and what is actually sold

Back 18

b) an adjustment for capital depreciation

Front 19

19. A steady state may be defined as
a) an equilibrium between the supply and demand for consumer goods
b) a point at which the capital stock per worker is stabilized
c) an economy without short run fluctuations in GDP
d) a state in which the marginal product of capital is neither increasing nor decreasing e) an economy in which monetary policy is conducted by rules rather than discretion

Back 19

b) a point at which the capital stock per worker is stabilized

Front 20

20. By definition, the capital stock of a country is expanding if
a) gross fixed capital formation is positive
b) depreciation is positive
c) the marginal product of capital is positive
d) net investment is positive
e) the steady state has been achieved

Back 20

d) net investment is positive

Front 21

21. In a steady state,
a) I(t) = 0
b) D(t) = 0
c) K(t) = 0
d) K(t – 1) = I(t)
e) I(t) = D(t)

Back 21

e) I(t) = D(t)

Front 22

22. For any economy with an existing capital stock of $800 million and annual
depreciation of 5%, a steady state occurs if
a) gross investment = $840 million
b) gross investment = $1600 million
c) gross investment = $40 million
d) net investment = $5 million
e) net investment = $800 million

Back 22

c) gross investment = $40 million

Front 23

23. During the 20th
century, convergence occurred most clearly
a) between Africa and North America
b) between China and Western Europe
c) within Western Europe
d) between Japan and South America
e) between India and North America

Back 23

c) within Western Europe

Front 24

24. The rate at which a country saves its income has no effect on
a) its long run growth rate
b) its short run GDP
c) its long run standard of living
d) its investment behavior
e) its interest rates

Back 24

a) its long run growth rate

Front 25

Consider an economy with the production function
Y =100*sqrt( K), a depreciation rate of 5%, a
saving and investing rate of 10%, and no labor growth.

25. In this economy, the steady-state capital stock is
a) 1,000
b) 10,000
c) 20,000
d) 40,000
e) 50,000

Back 25

d) 40,000

Front 26

Consider an economy with the production function
Y =100*sqrt( K), a depreciation rate of 5%, a
saving and investing rate of 10%, and no labor growth.

26. Each year in this economy,
a) output is 20,000 and consumption is 18,000
b) output is 100,000 and consumption is 95,000
c) output is 50,000 and consumption is 1,000
d) output is 10,000 and consumption is 9,000
e) output is 25,000 and consumption is 10,000

Back 26

a) output is 20,000 and consumption is 18,000

Front 27

Consider an economy with the production function
Y =100*sqrt( K), a depreciation rate of 5%, a
saving and investing rate of 10%, and no labor growth.

27. If the saving and investing rate rose to 20% of income, in the long run, this
economy’s GDP would
a) increase by 10%
b) decrease by 10%
c) double
d) stay the same
e) rise by a factor of 10

Back 27

c) double

Front 28

28. The experience of Asia from 1960 to the end of the 20th
century suggests that higher
investment rates
a) lead to excess capacity and long-term unemployment
b) can stimulate economic growth until the steady state is reached
c) reduce the rate of economic growth in the short run and increase it in the long run
d) are not influence by domestic saving or interest rates
e) cannot be sustained because they ultimately induce higher depreciation rates

Back 28

b) can stimulate economic growth until the steady state is reached

Front 29

29. The Golden Rule for achieving the highest sustainable long run level of consumption
per capita is to equate
a) saving with investment
b) investment with depreciation
c) depreciation with the marginal product of capital
d) the marginal product of capital with saving
e) output with investment

Back 29

c) depreciation with the marginal product of capital

Front 30

30. For an economy with the production function
Y 100 K and a depreciation rate of
5%, the Golden Rule investment rate is
a) 5%
b) 100
c) 50%
d) 10%
e) √0.5

Back 30

c) 50%

Front 31

31. For an economy with a Cobb-Douglas production function in which 1/3 of income
goes to capital and 2/3 of income goes to labor, and which has a 6% rate of depreciation,
the Golden Rule investment rate is
a) 1/3
b) 2/3
c) 6%
d) 2%
e) 4%

Back 31

a) 1/3

Front 32

32. If the rate of investment exceeds the rate recommended by the Golden Rule,
a) the economy will not reach a steady state
b) long run consumption will fall below its Golden-Rule level
c) the economy will experience sustained long run growth
d) the marginal product of capital will increase
e) the rate of depreciation will speed up

Back 32

b) long run consumption will fall below its Golden-Rule level

Front 33

33. The Demographic transition is important for growth since it results in a temporary
a) rise in the overall dependency ratio and so an increase in savings
b) fall in the overall dependency ratio and so an increase in saving
c) rise in the overall dependency ratio and so a fall in savings
d) fall in the overall dependency ratio and so a fall in savings
e) a rise in the overall dependency ratio but no impact on savings

Back 33

b) fall in the overall dependency ratio and so an increase in saving

Front 34

34. The Demographic transition is temporary because
a) higher child dependency ratios are eventually offset by lower old age dependency
ratios
b) higher child dependency ratios are eventually offset by higher old age dependency
ratios
c) lower child dependency ratios are eventually offset by lower old age dependency
ratios
d) lower child dependency ratios are eventually offset by higher old age dependency
ratios
e) lower child dependency ratios are temporary

Back 34

d) lower child dependency ratios are eventually offset by higher old age dependency
ratios

Front 35

35. Growth accounting for China demonstrates that
a) Unlike the Asian tiger economies such a Singapore, rapid economic growth has been
largely driven by capital accumulation
b) Like the Asian tiger economies such a Singapore, rapid economic growth has been
largely driven by capital accumulation
c) Unlike the Asian tiger economies such a Singapore, rapid economic growth has
been largely driven by rapid population growth
d) Like the Asian tiger economies such a Singapore, rapid economic growth has been
largely driven by rapid population growth
e) Like the Asian tiger economies such a Singapore, low investment rates have held back
Chinese growth

Back 35

c) Unlike the Asian tiger economies such a Singapore, rapid economic growth has
been largely driven by rapid population growth