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Question 1

The figure above represents an economy with a constant population and unchanging labour
force participation as well as unchanging technology. Assume that output only has two uses:
consumption and investment.

Aggregate consumption in the steady-state according to this diagram is...

Your answer:

c) the length of line segment E-k2.

Correct answer:
 d) none of the other answers are correct.

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We can only determine per capita consumption from this figure.

Question 2

"Dynamic inefficiency" in the context of a model of economic growth means...

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Correct answer:

d) ...none of the other answers are correct.

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A dynamically inefficient steady state has a capital intensity above the golden-rule capital
intensity so that the present generation could gain by consuming more and future generations
could gain, too. Note: The steady-states considered in this chapter are long-run trends where
cyclical unemployment is not the issue; a non-golden-rule-steady-state can be either efficient or
inefficient in the dynamic sense.

Question 3
 The figure above represents an economy with a population growing at rate n with an unchanging
labour force participation rate. The rate of technological progress is a and the rate of depreciation
is δ.

In the steady state of this model, output per unit labour...

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Correct answer:

a) will grow at the rate a.

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See Figure 3.15

Question 4

The Solow residual...

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 Correct answer:

c) ...is the difference between the rate of growth of output and the rate of growth of inputs.

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Actually the growth rates of different inputs are averaged with weights corresponding to their
economic significance.

Question 5

"Capital widening" refers to that part of investment needed to...

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c) ...equip new units of effective workers at the same capital per unit effective labour ratio.

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Note: the artificial concept of effective labourers somewhat stretches the metaphor of capital
widening. It makes most intuitive sense when a = 0 and the investment is literally used to equip
new workers.

Question 6

The aggregate production function for the Solow growth model assumes (A) ___________
returns to scale and (B) _____________marginal productivity of labour and capital.

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Correct answer:

b) A: constant
 B: diminishing

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The text assumes constant returns to scale (e.g. a doubling of all inputs would exactly double
output), this allows us to divide through all variables for the production function by effective
labour in order to work with output or capital per unit of effective labour. Diminishing marginal
productivity of labour turns out to be important later when discussing the demand for labour
(Chapter 4).

Question 7

Among the so-called "stylized facts" of economic growth, economists have noted that over time
that the share of national income paid to labour (A) ____________ and capital intensity (B)
_____________.

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Correct answer:

d) A: displays no trend

B: follows a positive trend

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Labour's share does not follow a long-term trend and capital intensity has a positive trend. Why
we care about these stylized facts: these provide empirical benchmarks any theory of growth
should be consistent with.

Question 8

When comparing China and western Europe in the fourteenth century it turns out that...

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 Correct answer:

c) ... China was technically more advanced

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They were equally footing in terms of market outcome and china may be more advanced in
technically development.

Question 9

The labour measure (L) is...

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Correct answer:

a) ...the average number of workers employed * average hours worked

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Since this value is measured during a period it is the average number of workers employed *
average hours worked. L = N*h

Question 10

The production function Y = F(K,L) states that...

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Correct answer:

d) ...none of the statements is true.

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The output depends on capital (K) and labour (L). They are independent in the short term and
are correlated to Y.