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Instructor: Prof. Dr. Alexi Danchev

**Test on Solow model.
**

Registration No. Group Maximum scores = 40. Name of the students Time allowed one academic hours.

Answer all questions. All questions carry equal marks. There are no penalties for incorrect answers. For each question, circle the appropriate letter. Do not circle more than one letter. If you wish to change your answer, clearly cross out your first selection. Ambiguous or unclear responses will be regarded as incorrect answers. Section I. TRUE / FALSE QUESTIONS. (circle the correct answer) 1 TRUE FALSE Per capita output is an increasing function of the capital-labour ratio and is subject to diminishing marginal productivity of capital.

2

TRUE

FALSE

The rate of per capita capital accumulation that maintains a constant capitallabour ratio is normally shown as the ray having a slope equal to the growth rate of the population

3

TRUE

FALSE

If the savings rate rises from (1 - bo) to (1 - bl) the savings function shifts downwards.

4

TRUE

FALSE

The level of the capital/labour ratio at which the growth rates of capital and labour are equal is called the steady-state

5

TRUE

FALSE

Solow—Swan model has a great defect as an explanation of economic growth in the real world because in the model, there is no growth of output per worker in the very long run (the steady state);

Section II. MULTIPLE CHOICE QUESTIONS. (circle the correct answer) 1. Which of the following countries had the fastest rate of economic growth since 1950s a. United States b. United Kingdom c. Germany d. Japan e. Turkey 2. When we study economic growth we are most concerned about changes in a. the capital- output ratio b. the level of natural real output c. the absolute difference between natural and actual real output d. output per capita

6.S. slow residual growth of the capital stock d. in the short run a. which allowed all highly skilled Eastern Europeans who so desired to immigrate to the U. the per capita savings ratio b. Preliminary studies indicate that the majority of immigrants would be doctors. According to Solow’s growth theory. the GNP per capita to fall even though total production increases c. the GNP per capita to rise as the production function shifts downward d. the production function has the characteristic known as a. none of the above are correct 4. scientists and economists. constant marginal productivity c. decreasing returns to scale. the GNP per capita to rise as the production function shifts upward b. none of the above Suppose that the U. all of the above e. diminishing marginal productivity d. none of above Suppose that the government passes a law requiring households to increase savings 10% above previous levels. output per capita stays constant D.e. is impossible to achieve since capital for new workers requires continuous increases in s. increasing returns to scale e. n C. computer programmers. output per capita grows more rapidly b.S. must replace “worn out” capital d. adopted a new immigration policy with respect to Eastern Europe. suggests that the slowdown is primarily caused by a. reduced growth in the technical change or total factor productivity c. the changes in the global warming The investment required to maintain steady state growth a. reduced growth in the capital stock per hour of work b. 7. constant returns to scale b. ignorance since people save and invest less e. When an equal percentage increase in the factors of production raises real GNP by the same percentage. output per capita grows at the constant steady state rate. none of these 3. 5. The application of Solow’s growth theory to the explanation of the slowdown in productivity growth in the U.S. must equip new workers with capital equal to that employed by existing workers c. Figure 12-1 . In the short run we would expect a. b and c e.

the further an economy is below its steady-state value of k.OUTPUT PER HEAD H B E I P Q/N = AoF(K/N) F C 0 (K/N)0 CAPITAL PER WORKER 8. the faster the economy grows. The growth of depreciation and population e. the faster the economy grows. the economy is at point B on Figure 12-1. the further an economy is above its steady-state value of k. new technology discoveries b. the closer an economy is to its steady-state value of k. increasing per capita output with increasing capital per capita B to C. doubling of inputs will lead to a two-fold increase in output d. The higher steady state has . d. b. a. Initially. the movement B to C. The growth of capital and the growth of labour. a doubling of inputs will lead to a constant output c. the faster the economy grows. c. increasing output. b. If the economy is characterized by increasing returns to scale then a a. none of above 11. d. Initially. The growth of labor and technical progress c. c. the movement B to F. Which of the following is true a. e. a doubling of inputs will lead to a more than two-fold increase in output b. doubling of inputs will lead to a less than two-fold increase in output e. improved health and education per worker c. the slower the economy grows. the movement B to H. According to the Solow model of growth. saving and capital per capita _____ 10. The growth of capital and technical progress b. According to the Solow growth model. None of above 12. increasing per capita output without increasing savings B to I. The growth of saving ratio and capital/labor ratio 13. the discovery of a cold fusion process which reduces the cost of energy by 50%. ceteris paribus. The growth of output is a weighted average of a. d. will shift the economy from B to H. in the short run. the movement B to E. an increase in the output per capita without an increase in capital per worker is represented by and could be the result of a. the economy is at point B on Figure 12-1. a decrease in the savings rate ______ 9. increasing per capita output without increasing capital per capita B to C. an increase in the savings rate d. the further an economy is below its steady-state value of k.

Dynamically inefficient economies simply invest too much and consume too little. too much capital has been accumulated. and population are growing at decreasing rates. higher output per worker b. consumption. If the capital-labour ratio exceeds its steady state value. b. consumption. 17. output. and population are independent in their growth rates. e. c. and population are not growing at all. d. The marginal product of capital is independent on the population growth rate. a plus b e. Explain the basic drawbacks of exogenous growth theory. From the Golden Rule is follows that a. SHORT THEORETICAL ESSAY. e. . Section III. an economy can consume more today and in the future. capital. how much saving is desirable b. Countries that save more tend to invest more. The investment and saving should be disconnected c. Dynamic inefficiency means that a. how much income should be saved to reach the highest possible level of per capita consumption (public and private) in the steady state. consumption. b. e. Section IV. A balanced growth path is a situation in which a. all of the above. output. c. d. b.a. Feldstein-Horioka puzzle means that a. 14. given the population growth and the state of technology c. It is illustrated by the economies of Eastern Europe during the centrally planned system. capital. Both investment and saving depend on consumption d. capital. output. The marginal product of capital is equal to the population growth rate. The growth rates are weighted average of the growth of capital plus the growth of labor. lower consumption per worker e. All of the above. c. The marginal product of capital is more than the population growth rate. Saving is independent on the growth rates of economy. The golden rule gives answer of the question: a. increase of labour force c. consumption. The marginal product of capital is proportional to the population growth rate. b plus c 16. By reducing savings now. The marginal product of capital is less that to the population growth rate. Please. 15. 18. and population are growing at increasing rates. e. lower output per worker d. b. output. and population are growing at constant rates. capital. consumption. output. capital. d. answer ONLY ONE of the following questions: (it is desirable to support the answers of the questions with graphical illustrations). REVIEW ESSAY QUESTIONS. how much should be the rate of depreciation d.

.b) = 1 percent. Note also that while these two concepts are identical in functions of one independent variable. MULTIPLE CHOICE QUESTIONS. Why was the Harrod-Domar model of economic growth incomplete and how did Solow improve upon it in his theory of economic growth? Correct answers: Section I. CASE STUDY QUESTIONS. because the labor elasticity of real GNP is (1-b). reduces the amount by which total output increases (i. 1 D 11 A 2 D 12 C 3 A 13 E 4 B 14 B 5 D 15 D 6 B 16 A 7 C 17 E 8 B 18 D 9 D 10 C Section IV.. the concept of constant-returns-to-scale implies that if all of the input factors are increased by a certain proportion. is less than one. However. b. 2. First.g. every unit increase in the capital stock while holding the quantity of labor fixed will increase output by less. Thus. functions of this type are called “homogeneous of degree one” or “linearly homogeneous. A production function has the property of diminishing “marginal” returns when the employment of each additional unit of one of the input factors. and the same result is true of changes in the quantity of labor. Because the capital elasticity of real GNP. every one percent increase in both capital and labor will increase the level of output by b + (1 . while holding the others constant. However. TRUE / FALSE QUESTIONS. Can a production function have the properties of diminishing returns and constant returns to scale at the same time? Explain your answer by pointing out the difference between these two concepts. b> 1. . the change in the level of output falls as the capital stock continues rise. 1. Yes. production functions are usually assumed to be characterized by both diminishing returns and constant returns to scale (e. this production function exhibits diminishing returns in capital. In mathematical terms. consider the standard Cobb-Douglas production function: Q = AKbN1-b. Thus. the identity that saving equals investment (S = I) was combined with the definition of investment to arrive at an identity which relates the level of national saving to the growth rate of capital and the capital depreciation rate: S = (∆K/K + d) K.1. In fact. 2. this production function also exhibits constant returns to scale. i. 1 TRUE 2 TRUE 3 FALSE 4 TRUE 5 TRUE Section II. the marginal product of that input factor). 2. then the output level will rise by exactly that same proportion. The original Harrod-Domar model of economic growth was developed in two fundamental steps.e.” To see these relationships more clearly. the Cobb-Douglas production function). they are generally two distinct concepts.e.

so that (K/N) will eventually fall until ∆(K/N) = 0 and the steady state condition is satisfied. the important aspect that the production function added was the property of diminishing returns to the capital-labor ratio. K However. . K/N and recognizing that when (K/N) is growing faster than (Q/N). Solow solved this problem by incorporating the perperson production function into the model: SQ/N = (n + d) . Thus. the steady state condition that the growth rate of capital stock must equal the population growth rate (k = n) was incorporated to develop the theoretical steady state condition that the saving per unit of capital equals the sum of the population growth rate and the depreciation rate: SQ/K = n + d. the need for workers and depreciation capital is in excess of total saving. this model was said to have “knife-edge stability” in that there was no equilibrating forces which guided the seemingly independent factors to be consistent with the steady state condition.Secondly.

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