ECON10262 - ECON20262
Macroeconomics 2
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
...
ECON10262 - ECON20262
Macroeconomics 2
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 are 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: Medium 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 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, etc.—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 persons 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 are 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 persons at a time
e. None of these answers are 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
b. orange juice
c. a jacket
d. All of these answers are correct.
e. None of these answers are correct.
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: Medium 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: Medium REF: 6.2 TOP: II.C.
MSC: Analyzing12. 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: Medium 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: Medium 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: Medium 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: Medium 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: Medium REF: 6.2 TOP: II.C.
MSC: Understanding
17. The difference between total factor productivity (TFP) and the stock of ideas 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: Medium 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:
a. charge a price equal to the marginal cost
b. charge a price higher than the marginal cost
c. charge a price lower than the marginal cost
d. charge a price equal to the average fixed cost
e. charge a price lower than the average fixed cost
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. With monopolistic pricing, ________ are needed to generate ________.
a. profits; capital
b. costs; capital
c. profits; new ideas
d. variable costs; total factor productivity
e. profits; total factor productivity
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 taxesb. 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 are correct.
ANS: B DIF: Medium REF: 6.2 TOP: II.D.
MSC: Evaluating
26. 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
27. What might be an explanation for the production of open source, free software?
a. marginal cost is 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
28. 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
29. In the Romer model, what two key goods are produced?
a. a government good and new ideasb. 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 are correct.
ANS: B DIF: Easy REF: 6.3 TOP: III.
MSC: Understanding
30. 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
31. In the Romer model, the production function , where At is knowledge and Lyt is the amount
of labor in the output sector:
a. exhibits constant returns to labor and increasing returns to labor and knowledge
b. exhibits constant returns to labor and increasing returns to knowledge
c. exhibits increasing returns to labor and constant returns to labor and knowledge
d. exhibits decreasing returns to labor and constant returns to labor and knowledge
e. exhibits increasing returns to labor and increasing returns to labor and knowledge
ANS: A DIF: Medium REF: 6.3 TOP: III.
MSC: Understanding
32. 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
33. 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
34. In the Romer model, the more labor you dedicate to generating ideas, ________ but ________.
a. the faster you accumulate knowledge; at a loss to current output in the consumption sector
b. the faster you accumulate knowledge; at a gain to current output in the consumption sector
c. the slower you accumulate knowledge; at a loss to current output in the consumption
sector
d. the less you accumulate knowledge; at a gain to current output in the consumption sector
e. the more knowledge you lose; at a gain to current output in the consumption sector
ANS: A DIF: Medium REF: 6.3 TOP: III.A.MSC: Understanding
35. The production function in the Romer model is given by ________, where is ________.
a. ; the growth rate of capital
b. ; the growth rate of knowledge
c. ; the growth rate of population
d.
; the growth rate of knowledge
e. ; the growth rate of population
ANS: D DIF: Medium REF: 6.3 TOP: III.A.
MSC: Understanding
36. In the Romer model, output is increasing in ________ and decreasing in ________.
a. the saving rate; the depreciation rate
b. the research share; the growth rate of knowledge
c. the growth rate of knowledge; the fraction of population in the ideas sector
d. the growth rate of knowledge; the depreciation rate
e. the saving rate; the growth rate of knowledge
ANS: C DIF: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
37. In the Romer model, if an economy allocates all of its labor to production:
a. it will reduce output
b. it will reduce the number of ideas it generates
c. it will increase the number of ideas it generates
d. it will not generate any ideas
e. None of these answers are correct.
ANS: D DIF: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
38. 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 and capital accumulation
e. decreasing in the efficiency of creating knowledge and in the fraction of labor in research
and development
ANS: A DIF: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
39. In the Romer model, the growth rate of ideas, , is increasing in:
a. the research share and the total population
b. the knowledge efficiency parameter and the population growth rate
c. the knowledge efficiency parameter, the research share, and the total population
d. the knowledge efficiency parameter and the saving rate
e. the fraction of labor in research and development and the saving rateANS: C DIF: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
40. 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
41. 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
42. Suppose the parameters of the Romer model take the following values: ,
What is the growth rate of this country?
a. 10 percent d. 50 percent
b. 40 percent e. 0.10 percent
c. 0.02 percent
ANS: D DIF: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
43. Suppose the parameters of the Romer model take the following values: ,
. What is the growth rate of this country?
a. 2 percent d. 10 percent
b. 20 percent e. 0.01 percent
c. 0.2 percent
ANS: B DIF: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
44. Suppose the parameters of the Romer model take the following values: ,
. What is the number of researchers in this country?
a. 20 d. 0.10
b. 1 million e. 200
c. 100
ANS: C DIF: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing45. Suppose the parameters of the Romer model take the following values: ,
. 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: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
46. Suppose the parameters of the Romer model take the following values: ,
. What is the per capita income of this country in the
tenth 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
47. Suppose the parameters of the Romer model take the following values: ,
. 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: Medium REF: 6.3 TOP: III.A.
MSC: Analyzing
48. If 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
49. Suppose the Romer model parameters in East Timor are ,
, while in North Timor they are ,
, 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: Analyzing50. 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: Medium REF: 6.3 TOP: III.B.
MSC: Remembering
51. 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
52. 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
53. 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: E DIF: Medium REF: 6.3 TOP: III.B.
MSC: Understanding
54. The Romer model might be better explained by considering:
a. 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: Medium REF: 6.3 TOP: III.B.
MSC: Understanding
55. In the Romer model, the Mexican economy:
a. never generates new ideas
b. does not need to generate ideas, as it can use those 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 sectorANS: B DIF: Medium REF: 6.3 TOP: III.H.
MSC: Evaluating
56. Nonrivalry in the Romer model means that ideas created:
a. can benefit only similar economies
b. can benefit only a few economies across the world
c. can be used only in the economy that devised them
d. can benefit virtually all economies across the world
e. None of these answers are correct.
ANS: D DIF: Easy REF: 6.3 TOP: III.B.
MSC: Evaluating
57. A balanced growth path is defined as a situation in which:
a. the output growth rate is zero
b. the growth rates of all endogenous variables are variable
c. the growth rates of some of the endogenous variables are constant
d. the 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
58. The parameter(s) in the Romer model is/are:
a. the initial stock of ideas, the population, the fraction of population in the ideas sector, and
the ideas efficiency parameter
b. the ideas efficiency parameter
c. the fraction of population in the ideas sector and the ideas efficiency parameter
d. the initial capital stock and the fraction of population in the ideas sector
e. the initial capital stock and the ideas efficiency parameter
ANS: A DIF: Medium REF: 6.3 TOP: III.C.
MSC: Understanding
Figure 6.1: Romer Model: Per Capita Output
59. 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. a decrease in the ideas efficiency parameter
b. an increase in the populationc. an increase in the research share
d. an increase in the saving rate
e. a decrease in the population
ANS: B DIF: Medium REF: 6.3 TOP: III.E.1.
MSC: Analyzing
Figure 6.2: Romer Model: Per Capita Output
60. In the Romer model in Figure 6.2, at time t0, a change in the shape of the production function can be
explained by:
a. an increase in the population
b. an increase in the research share
c. an increase in the ideas efficiency parameter
d. an increase in the saving rate
e. an increase in the growth rate
ANS: B DIF: Medium REF: 6.3 TOP: III.E.2.
MSC: Analyzing
61. 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: Medium REF: 6.3 TOP: III.E.1.
MSC: Analyzing
62. In the Romer model, if an economy’s research share decreases, there will be:
a. an immediate decrease in output and output growth slows
b. an immediate increase in output and output growth slows
c. an immediate increase in output and output growth accelerates
d. an immediate decrease in output and output growth accelerates
e. no change in output but output growth slows
ANS: B DIF: Medium REF: 6.3 TOP: III.E.2.
MSC: Analyzing63. 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 are correct.
ANS: B DIF: Medium REF: 6.3 TOP: III.F.
MSC: Analyzing
64. 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
65. 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: Medium REF: 6.3 TOP: III.F.
MSC: Understanding
66. 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: Medium REF: 6.3 TOP: III.F.
MSC: Understanding
67. 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
68. 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 foreverd. 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
69. 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
70. 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: Medium REF: 6.5 TOP: V.
MSC: Analyzing
71. Labor composition is used in ―growth accounting‖ because:
a. it includes total number of hours worked
b. it can include changes in the age distribution of the labor force
c. it can include the educational attainment in the labor force
d. it includes the total number of workers
e. All of these answers are correct.
ANS: C DIF: Medium REF: 6.5 TOP: V.
MSC: Understanding
72. ―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
73. 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 are correct.ANS: C DIF: Medium REF: 6.5 TOP: V.
MSC: Understanding
74. 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: Medium REF: 6.5 TOP: V.
MSC: Understanding
75. 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: Medium REF: 6.5 TOP: V.
MSC: Understanding
76. 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: Medium REF: 6.5 TOP: V.
MSC: Analyzing
77. For the years 2007–2011, 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. 0.4 percent d. 1.2 percent
b. 2.6 percent e. 1.3 percent
c. 3.4 percent
ANS: A DIF: Medium REF: 6.5 TOP: V.
MSC: Analyzing
78. 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: Medium REF: 6.5 TOP: V.
MSC: AnalyzingRefer to the following table when answering the next four 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
79. Consider the growth accounting data in Table 6.1. If the production function is given by
, the growth rate of per capita GDP for 19482011 is:
a. 1.7 percent d. 2.6 percent
b. 2.1 percent e. 1.8 percent
c. 3.3 percent
ANS: E DIF: Medium REF: 6.5 TOP: V.
MSC: Analyzing
80. Consider the growth accounting data in Table 6.1. If the production function is given by
, the growth rate of per capita GDP for 19481973 is:
a. 1.7 percent d. 0.0 percent
b. 0.8 percent e. 2.6 percent
c. 1.1 percent
ANS: E DIF: Medium REF: 6.5 TOP: V.
MSC: Analyzing
81. Consider the growth accounting data in Table 6.1. If the production function is given by
, the growth rate of per capita GDP for 1995–2007 is:
a. 2.2 percent d. 1.5 percent
b. 2.8 percent e. 0.9 percent
c. 2.0 percent
ANS: A DIF: Medium REF: 6.5 TOP: V.
MSC: Analyzing
82. Consider the growth accounting data in Table 6.1. 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.
c. 1995–2007
ANS: A DIF: Medium REF: 6.5 TOP: V.
MSC: Evaluating
83. 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. educationANS: A DIF: Medium REF: 6.5 TOP: V.
MSC: Evaluating
84. 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
85. 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
86. 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
87. 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 idea(s).
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: Medium 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 monopolistic competition, the price is equal to the marginal cost.
ANS: F DIF: Medium REF: 6.2 TOP: II.C.
MSC: Understanding
8. Offering inventors prizes 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 more slowly you accumulate
knowledge, but at a loss to current output in the consumption sector.
ANS: F DIF: Medium REF: 6.3 TOP: III.A.
MSC: Understanding
NOT: It should read ―In the Romer model, the more labor you dedicate to generating ideas, the faster
you accumulate knowledge, but at a loss to current output in the consumption sector.‖
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 Côte 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: Medium 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: Medium 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: Medium 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: Medium 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: Medium 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: Medium 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. 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: ; that is, 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 and
decrease, 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
Engineer
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 to gross national product share.
Define the percentage of science and engineering students as 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 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
7. 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 1973–95 was the
slowest, which was the growth slowdown. The ―Internet‖ expansion of the 1990s had the second
fastest.
c) The slowest TFP was in 2007–11, likely due to the Great Recession.
DIF: Difficult REF: 6.5 TOP: V. MSC: Evaluating
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