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Production and Growth
Multiple Choice – Section 00: Introduction
1. The average income in a rich country, such as the United States or Japan, is more than
a. 3 times, but less than 5 times, the average income in a poor country, such as Indonesia or
Nigeria.
b. 5 times, but less than 10 times, the average income in a poor country, such as Indonesia or
Nigeria.
c. 10 times, but less than 20 times, the average income in a poor country, such as Indonesia or
Nigeria.
d. more than 20 times the average income in a poor country, such as Indonesia or Nigeria.
ANSWER: c
DIFFICULTY: Difficulty: Easy
LEARNING OBJECTIVES: ECON.MANK.15.120 - LO: 25-0
NATIONAL STANDARDS: United States - BUSPROG: Analytic
TOPICS: DISC: Thinking Like an Economist Overview of World Economy
KEYWORDS: BLOOM'S: Knowledge
2. The average income in a rich country

a. is about 5 times that in a poor country. Further, people in rich countries have longer life
expectancy.
b. is about 5 times that in a poor country. However, people in rich countries have about the same
life expectancy as those in poor countries.
c. is more than ten times that in a poor country. Further, people in rich countries have longer life
expectancy.
d. is more than ten times that in poor country. However, people in rich countries have about the
6072 Production and Growth
same life expectancy as those in poor countries.
ANSWER: c
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Production and Growth 6073
3. Which of the following are residents of rich countries likely to have in greater quantities, or better
quality, than residents of poor countries?
a. housing
b. healthcare
c. life expectancy
d. All of the above.
ANSWER: d
4. Over the past century in the United States, real GDP per person has grown, on average, by about
a. 1 percent per year.
b. 2 percent per year.
c. 3 percent per year.
d. 5 percent per year.
ANSWER: b
TOPICS: DISC: Thinking Like an Economist Overview of US Economy
5. During the past century the average growth rate of U.S. real GDP per person implies that it
doubled, on average, about every
a. 100 years.
b. 70 years.
c. 35 years.
d. 25 years.
ANSWER: c
KEYWORDS: BLOOM'S: Comprehension
6. Over the last century, U.S. real GDP per person grew at a rate of about
a. 2 percent per year, so that it is now 2 times as high as it was a century ago.
b. 2 percent per year, so that it is now 8 times as high as it was a century ago.
c. 4 percent per year, so that it is now 2 times as high as it was a century ago.
d. 4 percent per year, so that it is now 8 times as high as it was a century ago.
ANSWER: b
7. In some East Asian countries, average income, as measured by real GDP per person, has recently
grown at an average annual rate that implies output will double about every
a. 10 years.
b. 15 years.
c. 20 years.
d. 25 years.
ANSWER: a
DIFFICULTY: Difficulty: Moderate
8. A country experiencing a growth rate of 12% per year can go from being one of the poorest to one
of the richest in how many generations?
a. one
b. two
c. three
d. four
ANSWER: a
TOPICS: DISC : Growth Theory Growth
9. A country experiencing a growth rate of 12% per year can go from being one of the poorest to one
of the richest in
a. one generation. In the last couple of decades China’s growth rate has been higher than 12%.
b. one generation. However, in the last couple of decades not even China’s growth rate has been
this high.
c. three generations. In the last couple of decades China’s growth rate has been higher than 12%.
d. three generations. However, in the last couple of decades not even China’s growth rate has been
this high.
ANSWER: a
TOPICS: DISC : Growth Theory Growth
NOTES: r
10. In which of the following countries has economic growth been sufficiently high that income would
double every ten years?
a. India
b. Mexico
c. South Korea
d. Zimbabwe
ANSWER: c
NOTES: r
11. In which of the following countries has economic growth been sufficiently high that income would
double every ten years?
a. Singapore
b. Nigeria
c. India
d. Indonesia
ANSWER: a
NOTES: r
12. Average income has been stagnant for many years in

a. Western European counties.
b. some Asian countries like South Korea and Singapore.
c. some Sub-Saharan African countries.
d. All of the above are correct.
ANSWER: c
NOTES: r
13. Which of the following is a good gauge of economic progress?

a. the level of real GDP per person, but not the growth rate of real GDP per person
b. the level of real GDP per person and the growth rate of real GDP per person
c. the growth rate of real GDP per person, but not the level of real GDP per person
d. neither the level nor the growth rate of real GDP per person
ANSWER: c
TOPICS: DISC : Measuring Output Growth
14. In which of the following countries did real GDP per person fall by about 38% from 1991 to
2011?
a. India
b. Singapore
c. Zimbabwe
d. None of the above are correct.
ANSWER: c
NOTES: n
15. Productivity is the amount of goods and services

a. an economy produces. It is not linked to a nation’s economic policies.
b. an economy produces. It is linked to a nation’s economic policies.
c. produced for each hour of a worker’s time. It is not linked to a nation’s economic policies.
d. produced for each hour of a worker’s time. It is linked to a nation’s economic policies.
ANSWER: d
TOPICS: DISC: Growth Theory Productivity
16. A nation’s standard of living is determined by

a. the percentage of its GDP that is accounted for by government purchases.
b. the quantity of natural resources with which it is endowed.
c. the productivity of its workers.
d. factors and events that are beyond the nation’s control.
ANSWER: c
Multiple Choice – Section 01: Economic Growth around the World
1. A nation's standard of living is best measured by its

a. real GDP.
b. real GDP per person.
c. nominal GDP.
d. nominal GDP per person.
ANSWER: b
TOPICS: DISC : Mesuring Output GDP
2. Which of the following can be measured by the level of real GDP per person?
a. productivity and the standard of living
b. productivity but not the standard of living
c. the standard of living but not productivity
d. neither the standard of living nor productivity
ANSWER: c
TOPICS: DISC: Measuring Output GDP
3. The level of real GDP person

a. differs widely across countries, but the growth rate of real GDP per person is similar across
countries.
b. is very similar across countries, but the growth rate of real GDP per person differs widely
across countries.
c. and the growth rate of real GDP per person are similar across countries.
d. and the growth rate of real GDP per person vary widely across countries.
ANSWER: d
4. As of 2010, using real GDP per person as a measure, we would classify

a. the United States and Mexico as advanced economies and Bangladesh as a middle-income
country.
b. Canada as an advanced economy, Mexico as a middle-income country, and Pakistan as a poor
country.
c. Japan and India as advanced economies and Mexico as a poor country.
d. Japan as an advanced economy, the United Kingdom as a middle-income country, and Argentina
as a poor country.
ANSWER: b
5. Measured in 2010 dollars, real GDP per person in the United States in 2010 was about 14 times
that in
a. China.
b. India.
c. Indonesia.
d. Pakistan.
ANSWER: b
NOTES: r
6. Which of the following statements is correct? In 2010,

a. real income per person in the U.S. was about 6 times that in China.
b. real income per person in China was more than 2 times that in India.
c. the typical resident of India had less real income than the typical resident of England in 1870.
ANSWER: d
NOTES: r
7. In 2010, real GDP per person in Bangladesh was

a. about 3 times as high as it was in the U.S. in 1870.
b. about twice as high as it was in the U.S. in 1870.
c. about the same as it was in the U.S. in 1870.
d. less than it was in the U.S. in 1870.
ANSWER: d
8. In 2010, the typical Bangladeshi had about

a. less than half the real income of a typical American a century ago.
b. about the same real income of a typical American a century ago.
c. 2 times as much real income as that of a typical American a century ago.
d. 4 times as much real income as that of a typical American a century ago.
ANSWER: a
9. Measured in 2010 dollars, real GDP per person in the United States in 2010 was about
a. $37,000.
b. $47,000.
c. $57,000.
d. $67,000.
ANSWER: b
10. Which of the following countries had the highest level of real GDP per person in 2010?
a. Germany
b. Canada
c. United States
d. Japan
ANSWER: c
NOTES: r
11. Which of the following countries had the lowest level of real GDP per person in 2010?
a. Bangladesh
b. Indonesia
c. Mexico
d. China
ANSWER: a
12. Which of the following measures how the level of well-being in a country has changed over time?
a. level of nominal GDP per person.
b. growth rate of nominal GDP.
c. growth rate of real GDP.
d. growth rate of real GDP per person.
ANSWER: d
TOPICS: DISC: Measuring Output Growth
13. Which of the following is correct?

a. Countries with the highest growth rates over the last 120 years are the ones that had the
highest level of real GDP 120 years ago.
b. Most countries have had little fluctuation around their average growth rates during the past 120
years.
c. The ranking of countries by income changes little over time.
d. Even though Japan had a higher growth rate of real GDP per person than the U.S. over the last
120 years, it’s
level of real GDP per person is less than that of the U.S.
ANSWER: d
NOTES: r
14. Which of the following is not correct?

a. Across countries there are large differences in the average income per person. These
differences are reflected in large differences in the quality of life.
b. With a growth rate of about 2 percent per year, average income per person doubles about
every 60 years.
c. The ranking of countries by average income changes substantially over time.
d. In some countries real income per person has changed very little over many years.
ANSWER: b
NOTES: r
15. Which of the following statements is correct?

a. In the late 1800s, real GDP per person was higher in the United Kingdom than in the United
States.
b. In 2010, real GDP per person was higher in the United Kingdom than in the United States.
c. The average annual growth rate of real GDP was higher in the United Kingdom than in the
United States between the late 1800s and 2010.
ANSWER: a
16. Countries that have lower levels of real GDP per person than the United States
a. tend to have growth rates that are higher than that of the United States.
b. tend to have growth rates that are about the same as that of the United States.
c. tend to have growth rates that are lower than that of the United States.
d. in some cases have growth rates that are higher than that of the United States and in other
cases lower than that of the United States.
ANSWER: d
17. Country A experienced a growth rate of real GDP per person of 2.5 percent per year throughout
the 1900’s. In view of other countries’ experiences during this time country A’s growth was
a. exceptionally high.
b. moderately high.
c. moderately low.
d. exceptionally low.
ANSWER: a
18. Country A experienced a growth rate of real GDP per person of 0.5 percent per year throughout
the 1900’s. In view of other countries’ experiences, country A’s growth was
a. exceptionally high.
b. moderately high.
c. moderately low.
d. exceptionally low.
ANSWER: d
19. Countries that grew the fastest over the last 100 or so years had average growth rates of real
income per person of about
a. 1.5 percent per year.
b. 2.0 percent per year.
c. 2.5 percent per year.
d. 3.0 percent per year.
ANSWER: c
NOTES: r
20. Among the following countries, which one has the highest level of real GDP per person but the
lowest growth rate of real GDP per person over a very long period of time?
a. the United Kingdom
b. Mexico
c. Argentina
d. China
ANSWER: a
21. Which of the following nations experienced average rates of economic growth of less than 2
percent over the last 100 years or so?
a. Bangladesh
b. Pakistan
c. United Kingdom
ANSWER: d
22. Which of the following nations experienced average rates of economic growth of a bit under 2%
over the last 100 years or so?
a. Mexico
b. Brazil
c. the United States
ANSWER: c
NOTES: r
23. Over the period 1900-2010, which of the following countries experienced the highest average
annual growth rate of real GDP per person?
a. Brazil
b. China
c. India
d. Pakistan
ANSWER: a
NOTES: n
24. Among the following countries, which one has the highest growth rate of real GDP per person
over about the last 100 years?
a. Argentina
b. Mexico
c. the United Kingdom
d. the United States
ANSWER: b
NOTES: r
25. Which of the following countries had the highest growth rate over about the last 100 years?
a. Japan
b. China
c. Germany
d. United States
ANSWER: a
NOTES: r
26. Which country has had a higher growth rate than the US over about the last 120 years?
a. Argentina
b. Germany
c. the United Kingdom
d. None of the above is correct.
ANSWER: b
27. Which country has had a higher growth rate than the U.S. over about the last 120 years?
a. India
b. Mexico
c. United Kingdom
d. Pakistan
ANSWER: b
28. Which list contains, in this order, a country whose real GDP per person grew faster and one
whose real GDP per person grew slower than real GDP per person in the U.S. over about the last
100 years?
a. Bangladesh, India
b. China, United Kingdom
c. Japan, Brazil
d. Pakistan, Mexico
ANSWER: b
NOTES: r
29. Which of the following pairs of countries experienced approximately the same rate of growth of
real income per person over about the last 120 years?
a. Germany and Japan
b. Indonesia and Bangladesh
c. the United States and Argentina
d. Mexico and Pakistan
ANSWER: c
NOTES: r
30. Of the following countries, which grew most slowly, in terms of real GDP per person, over about
the last 120 years?
a. Brazil
b. Mexico
c. China
d. United States
ANSWER: d
31. Which of these countries’ growth rates of real GDP per person have exceeded the United States’
growth rate of real GDP per person over the last century?
a. Canada and China
b. China and India
c. Germany and India
d. Germany and Pakistan
ANSWER: a
NOTES: r
32. Which of the following is indicated by the data on real income per person for various countries
over the past 100 or so years?
a. If, in a relatively poor country, real income per person had grown by 3.5 percent per year for
the last 100 years, it would be a relatively rich country today.
b. Rich countries became richer and poor countries became poorer.
c. In the United States, real income per person today is about four times as high as it was 120
years ago.
ANSWER: a
33. Japan is
a. an advanced economy, and over the past century its rate of economic growth has been higher
than that of the United States.
b. an advanced economy, and over the past century its rate of economic growth has been lower
c. a middle-income country, and over the past century its rate of economic growth has been higher
d. a middle-income country, and over the past century its rate of economic growth has been lower
ANSWER: a
34. The United Kingdom is

a. an advanced economy, and over the past century its rate of economic growth has been higher
b. an advanced economy, and over the past century its rate of economic growth has been lower
ANSWER: b
35. Mexico is
a. a poor country, and over the past century its rate of economic growth has been higher than that
of the United States.
b. a poor country, and over the past century its rate of economic growth has been lower than that
of the United States.
ANSWER: c
36. In 1870, the richest country in the world was

a. Germany.
b. Japan
c. the United Kingdom.
d. the United States.
ANSWER: c
NOTES: r

a. In 1870, real income per person was higher in the United States than in any other country at
that time.
b. Over about the last 100 years India experienced significantly higher growth of real income per
person than did the United States.
c. Over about the last 100 years the United States experienced significantly higher growth of real
income per person than did Japan.
ANSWER: d
NOTES: r

a. Over the last 100 years Japan had a higher average growth rate than the United States. It
follows that, today, the standard of living in Japan is higher than in the United States.
b. The typical person in Bangladesh today has about twice the real income of a typical American
100 years ago.
c. The typical citizen of China today has about one-half as much real income as the typical citizen
of America today.
ANSWER: d
39. Which of the following correctly ranks the three countries, from highest to lowest, for percentage
of high-school age children in school?
a. United Kingdom, Mali, Mexico.
b. Mexico, Mali, United Kingdom.
c. United Kingdom, Mexico, Mali.
d. Mali, Mexico, United Kingdom.
ANSWER: c
TOPICS: DISC : Thinking Like an Economist Overview of World Economy
40. One can argue that the average American today is “richer” than the richest American 100 years
ago, given that 100 years ago,
a. people’s nominal incomes were, on average, much lower than they are today.
b. personal fortunes were not accurately measured.
c. many of the goods and services that we now take for granted were not available.
d. international trade had not yet begun to flourish.
ANSWER: c
TOPICS: DISC : Thinking Like an Economist Overview of US Economy
41. Last year real GDP per person in the imaginary nation of Olympus was 4,250. The year before it
was 4,100. By about what percentage did Olympian real GDP per person grow during the period?
a. 1.6 percent
b. 2.5 percent
c. 3.7 percent
d. 6 percent
ANSWER: c
KEYWORDS: BLOOM'S: Application
NOTES: r
42. Last year real GDP in the imaginary nation of Oceania was 561.0 billion and the population was
2.2 million. The year before, real GDP was 500.0 billion and the population was 2.0 million. What
was the growth rate of real GDP per person during the year?
a. 12 percent
b. 10 percent
c. 4 percent
d. 2 percent
ANSWER: d
43. Last year real GDP in the imaginary nation of Populia was 907.5 billion and the population was 3.3
million. The year before real GDP was 750 billion and the population was 3 million. What was the
growth rate of real GDP per person during the year?
a. 10 percent
b. 14 percent
c. 17 percent
d. 21 percent
ANSWER: a
44. Last year the imaginary nation of Freedonia had a population of 2,800 and real GDP of
16,800,000. This year it had a population of 2,700 and real GDP of 15,390,000. About what was
the growth rate of real GDP per person between last year and this year?
a. -5.3 percent
b. -5 percent
c. 5 percent
d. 5.3 percent
ANSWER: b
NOTES: r
45. In 2012, the imaginary nation of Kanmiw had a population of 8,044 and real GDP of 36,198,000.
In 2013 it had a population of 7,800 and real GDP of 35,880,000. What was the growth rate of
real GDP per person in Kanmiw between 2012 and 2013?
a. -2.2 percent
b. -0.7 percent
c. 2.2 percent
d. 4.5 percent
ANSWER: c
NOTES: r
46. In 2011, the imaginary nation of Maconia had a population of 8,200 and real GDP of 210,500.
Maconia had 5% growth in real GDP per person. In 2012 it had a population of 8,400. To the
nearest dollar what was real GDP in Maconia in 2012?
a. 216,815
b. 221,025
c. 226,416
ANSWER: c
DIFFICULTY: Difficulty: Challenging
NOTES: r
47. In 2010, the imaginary nation of Bovina had a population of 5,000 and real GDP of 500,000. In
2011 it had a population of 5,100 and real GDP of 520,200. During 2011 real GDP per person in
Bovina grew by
a. 2 percent, which is high compared to average U.S. growth over the last one-hundred years.
b. 2 percent, which is about the same as average U.S. growth over the last one-hundred years.
c. 4 percent, which is high compared to average U.S. growth over the last one-hundred years.
d. 4 percent, which is about the same as average U.S. growth over the last one-hundred years.
ANSWER: c
48. In 2010, the imaginary nation of Bovina had a population of 5,000 and real GDP of 600,000. In
2011 it had a population of 5,200 and real GDP of 636,480. During 2011 real GDP per person in
Bovina grew by
ANSWER: b
NOTES: n
49. In 2010, the imaginary nation of Mainland had a population of 6,000 and real GDP of 120,000. In
2011 the population was 6,200 and real GDP of 128,960. Over the year in question, real GDP per
person in Mainland grew by
ANSWER: c
50. In 2009, the imaginary nation of Mainland had a population of 7,000 and real GDP of 210,000. In
2010 the population was 7,300 and real GDP of 223,380. Over the year in question, real GDP per
person in Mainland grew by
ANSWER: b
51. Last year the imaginary nation of Panglossia had real GDP of 400 billion. This year it had real
GDP of 472.5 billion. Which of the following changes in population is consistent with a 5 percent
growth rate of real GDP per person over the last year?
a. The population decreased from 75 million to 72 million.
b. The population decreased from 60 million to 50 million.
c. The population increased from 70 million to 80 million.
d. The population increased from 80 million to 90 million.
ANSWER: d
KEYWORDS: BLOOM'S: Analysis
NOTES: r
52. In 2012, the imaginary nation of Dorados had a population of 8,000 and real GDP of 3,000,000.
During the year its real GDP grew by about 2.9%. Which of the following sets of growth rates is
consistent with this growth in real GDP?
a. 2% population growth and 6% real GDP growth
b. 6% population growth and 2% real GDP growth
c. 4% population growth and 7% real GDP growth
d. 7% population growth and 4% real GDP growth
ANSWER: c
53. In 2012, the imaginary nation of Platland had a population of 10,000 and real GDP of 42,000,000.
During the year its real GDP per person grew by about 1.94%. Which of the following sets of
growth rates is consistent with this growth in real GDP per person?
a. 3% population growth and 4% real GDP growth
b. 3% population growth and 5% real GDP growth
c. 6% population growth and 4% real GDP growth
d. 6% population growth and 5% real GDP growth
ANSWER: b
NOTES: r
54. Which of the following pairs of terms refer to the same thing?
a. “capital” and “physical capital”
b. “technological knowledge” and “human capital”
c. “standard of living” and “human capital”
d. “standard of living” and “productivity”
ANSWER: a
Multiple Choice – Section 02: Productivity: Its Role and Determinants

a. Although levels of real GDP per person vary substantially from country to country, the growth
rate of real GDP per person is similar across countries.
b. Productivity is not closely linked to government policies.
c. The level of real GDP per person is a good gauge of economic prosperity, and the growth rate
of real GDP per person is a good gauge of economic progress.
d. Productivity may be measured by the growth rate of real GDP per person.
ANSWER: c
2. The one variable that stands out as the most significant explanation of large variations in living
standards around the world is
a. productivity.
b. population.
c. preferences.
d. prices.
ANSWER: a
3. Productivity is defined as the quantity of

a. labor required to produce a nation’s GDP.
b. labor required to produce one unit of goods and services.
c. goods and services produced from each unit of labor input.
d. goods and services produced per unit of time.
ANSWER: c
4. Which of the following is a correct way to measure productivity?

a. Divide the number of hours worked by the quantity of output.
b. Divide the quantity of output by the number of hours worked.
c. Determine how much output is produced in a given time.
d. Determine how much time it takes to produce a unit of output.
ANSWER: b
5. Which of the following statements is true?

a. Productivity is calculated as hours worked divided by output produced.
b. Americans have a higher standard of living than Indonesians because American workers are
more productive than Indonesian workers.
c. Both A and B are correct.
ANSWER: b

a. Countries that have had higher output growth per person have typically done so without higher
productivity growth.
b. A country's standard of living and its productivity are closely related.
c. Productivity refers to output produced per hour of work.
d. Increases in productivity can be used to increase output or leisure.
ANSWER: a
7. In determining living standards, productivity plays a key role

a. for individuals, but not for nations.
b. for nations, but not for individuals.
c. for both nations and individuals.
d. for neither nations nor individuals.
ANSWER: c
8. The key determinant of the standard of living in a country is

a. the amount of goods and services produced from each hour of a worker's time.
b. the total amount of goods and services produced within the country.
c. the total amount of its physical capital.
d. its growth rate of real GDP.
ANSWER: a
9. For a given year, productivity in a particular country is most closely matched with that country's
a. level of real GDP over that year.
b. level of real GDP divided by hours worked over that year.
c. growth rate of real GDP divided by hours worked over that year.
d. growth rate of real GDP per person over that year.
ANSWER: b
10. Which of the following would, by itself, reveal the most about a country’s standard of living?
a. its level of capital
b. the number of hours worked
c. its availability of natural resources
d. its productivity
ANSWER: d
11. Productivity
a. is nearly the same across countries, and so provides no help explaining differences in the
standard of living across countries.
b. explains very little of the differences in the standard of living across countries.
c. explains some, but not most of the differences in the standard of living across countries.
d. explains most of the differences in the standard of living across countries.
ANSWER: d
12. Productivity is the

a. key determinant of living standards, and growth in productivity is the key determinant of growth
in living standards.
b. key determinant of living standards, but growth in productivity is not the key determinant of
growth in living standards.
c. not the key determinant of living standards, but growth in productivity is the key determinant of
growth in living standards.
d. not the key determinant of living standards, and growth in productivity is not the key
determinant of growth in living standards.
ANSWER: a
13. Over the last ten years productivity grew faster in Mapoli than in Romeria while the population
and total hours worked remained the same in both countries. It follows that
a. real GDP per person grew faster in Mapoli than in Romeria.
b. real GDP per person must be higher in Mapoli than in Romeria.
c. the standard of living must be higher in Mapoli than in Romeria.
ANSWER: a
NOTES: r
14. Over the last ten years productivity grew more slowly in Iberia than in Aire while the population
and total hours worked remained the same in both countries. It follows that
a. real GDP per person must be lower in Iberia than in Aire.
b. real GDP per person grew more slowly in Iberia than in Aire.
c. the standard of living must be higher in Iberia than in Aire.
ANSWER: b
NOTES: r
15. Which of the following can explain faster growth of real GDP in country A than in Country B?
a. both greater population growth and greater productivity growth in Country A
b. greater population growth in Country A, but not greater productivity growth in Country A
c. greater productivity growth in Country A, but not greater population growth in Country A
d. neither greater population growth nor greater productivity growth in Country A
ANSWER: a
TOPICS: DISC; Measuring Output Growth
NOTES: r
16. Suppose that real GDP grew more in Country A than in Country B last year.
a. Country A must have a higher standard of living than country B.
b. Country A's productivity must have grown faster than country B's.
c. Both of the above are correct.
ANSWER: d
17. Given that a country’s real output has increased, in which of the following cases can we be sure
that its productivity also has increased?
a. The total number of hours worked rose.
b. The total number of hours worked stayed the same.
c. The total number of hours worked fell.
d. Both b and c are correct.
ANSWER: d
18. Phoenix furniture uses 12 workers, each working eight hours, to produce 192 rocking chairs.
What is Phoenix’s productivity?
a. 192 rocking chairs
b. 24 rocking chairs per hour
c. 2 rocking chairs per hour
d. 2 hours per rocking chair
ANSWER: c
NOTES: r
19. Hit-It produces 320 baseball bats per day using 2 workers who each work 8 hours per day. What
is HitIt’s productivity?
a. 320 baseball bats
b. 160 baseball bats per hour
c. 20 baseball bats per hour
ANSWER: c
NOTES: r
20. In one day Alpha Cabinet Company made 40 cabinets with 320 hours of labor. What was Alpha
Cabinet Company’s productivity?
a. 1/8 cabinet per hour
b. 8 hours per cabinet
c. 40 cabinets
ANSWER: a
21. In one day Madison Laundry washed 4,000 pounds of laundry with 5 workers who each worked 8
hours. What was its productivity?
a. 4000 pounds of laundry
b. 500 pounds of laundry per hour
c. 100 pounds of laundry per hour
ANSWER: c
22. Allied Business Consultants employs five researchers that each work 8 hour days. In one day the
researchers prepared 10 reports for its 2 largest clients. What was Allied Business Consultants’
productivity?
a. 10 reports
b. 5 reports per client
c. 1.25 reports per hour
d. 1/4 report per hour
ANSWER: d
NOTES: r
23. You and your friend work together for 4 hours to produce a total of 8 bookcases. What is
productivity?
a. 16 bookcases
b. 8 bookcases
c. 2 bookcases per hour
d. 1 bookcase per hour
ANSWER: d
NOTES: r
24. In one day Portal Computer Company made 400 laptops with 1200 hours of labor. What was its
productivity?
a. 1/3 laptop per hour
b. 3 hours per laptop
c. 1200 laptops
d. 400 laptops
ANSWER: a
25. Mary looks over reports on four of her workers. Jack made 30 baskets in 5 hours. Rudy made 32
baskets in 8 hours. Sam made 40 baskets in 12 hours. Walter made 22 baskets in four hours.
Who has the greatest productivity?
a. Jack
b. Rudy
c. Sam
d. Walter
ANSWER: a
NOTES: r
26. A barber shop produces 192 haircuts a day. Each barber in the shop works 8 hours per day and
produces the same number of haircuts per hour. If the shop’s productivity is 2 haircuts per hour of
labor, then how many barbers does the shop employ?
a. 8
b. 12
c. 16
ANSWER: b
NOTES: r
27. Miller’s Dairy produces 960 gallons of milk per day. Each milker at the dairy works 8 hours per
day and produces the same number of gallons of milk per hour. If the Dairy’s productivity is 12
gallons of milk per hour of labor, then how many milkers does the shop employ?
a. 8
b. 10
c. 80
d. 120
ANSWER: b
28. Gramp’s Potato Chips produces 2560 bags of potato chips a day. Each employee at Gramp’s
works 8 hours. If the company’s productivity is 20 bags per hour, how many people does Gramp’s
employ?
a. 8
b. 16
c. 24
ANSWER: b
NOTES: r
29. Greg’s Ice Cream produces 1120 gallons of ice cream per day. Each employed works seven
hours and has productivity of 20 gallons an hour. How many employees does Greg’s employ?
a. 160
b. 56
c. 8
ANSWER: c
30. Adam and Doug both build birdhouses. Adam works 30 hours a week and produces 15 bird
houses. Doug works 20 hours a week and produces 12 bird houses. Which of the following is
correct?
a. Adam’s production and productivity are higher than Doug’s.
b. Adam’s production is higher than Doug’s, but Doug’s productivity is higher than Adam’s.
c. Doug’s production is higher than Adam’s, but Adam’s productivity is higher than Doug’s.
d. Doug’s production and productivity are higher than Adam’s.
ANSWER: b
NOTES: r
31. Alexis and Tara both mine salt. Alexis mines 300 pounds in 20 hours. Tara mines 400 pounds in
40 hours. Which of the following is correct?
a. Alexis’s productivity is greater than Tara’s. This difference could be explained by Alexis
having more physical capital than Tara.
b. Alexis’s productivity is greater than Tara’s. This difference cannot be explained by a difference
in the physical capital each has.
c. Tara’s productivity is greater than Alexis’s. This difference could be explained by Tara having
more physical capital than Alexis.
d. Tara’s productivity is greater than Alexis’s. This difference cannot be explained by a difference
in the physical capital each has.
ANSWER: a
NOTES: r
32. Waldo works eight hours and produces 7 units of goods per hour. Emerson works six hours and
produces 10 units of goods per hour.
a. Waldo’s productivity and output are greater than Emerson’s.
b. Waldo’s productivity is greater than Emerson’s but his output is less.
c. Emerson’s productivity and output are greater than Waldo’s.
d. Emerson’s productivity is greater than Waldo’s but his output is less.
ANSWER: c
33. Popeye produces 20 cans of spinach in 8 hours. Wimpy produces 15 hamburgers in 10 hours. If
each hamburger trades for 1.5 cans of spinach, then
a. Popeye’s production and productivity are greater than Wimpy’s.
b. Popeye’s production is greater than Wimpy’s, but his productivity is less.
c. Wimpy’s production and productivity are greater than Popeye’s.
d. Wimpy’s production is greater than Popeye’s, but his productivity is less.
ANSWER: d
34. Nathan owns a bakery that bakes only cakes. All of his bakers work 8 hours per day. In 2011, he
employed 5 bakers who produced a total of 200 cakes each day. In 2012, he employed 6 bakers
who produced a total of 249 cakes each day. The bakery’s productivity
a. decreased by 2.33%.
b. increased by 2.33%.
c. increased by 3.75%.
d. increased by 24.50%.
ANSWER: c
35. Daniel owns a coffee kiosk. All of his employees work 8 hours per day. In 2011, he employed 6
people who produced a total of 912 cups of coffee each day. In 2012, he hired a seventh
employee and production increased to 1008 cups of coffee each day. In Daniel’s kiosk,
productivity
a. increased by about 10.5 percent
b. increased by 9.5 percent
c. decreased by about 5.6 percent
d. decreased by about 5.3 percent
ANSWER: d
NOTES: r
36. In 2011 Buckeye Brewing produced 1,000 bottles of ginger ale each day. It employed 10 workers
each working 8 hours a day. In 2012 it produced 960 bottles of ginger ale each day employing 8
workers who worked 8 hours each day. Productivity at Buckeye Brewing
a. increased by 20%.
b. increased by 16.67%.
c. decreased by 1.67%.
d. decreased by 40%.
ANSWER: a
37. In 2011, Modern Electronics, Inc. produced 60,000 calculators, employing 80 workers, each of
whom worked 8 hours per day. In 2012, the same firm produced 76,500 calculators, employing 85
workers, each of whom worked 10 hours per day. Productivity at Modern Electronics
a. decreased by 4%
b. remained constant.
c. increased by 8.33%
d. increased by 27.50%
ANSWER: a
38. Real Foods produced 400,000 cans of diced tomatoes last year and 460,000 cans of diced
tomatoes this year. It employed the same number of labor hours each year. Real Foods’
productivity
a. decreased 13%.
b. was unchanged.
c. increased 13%.
d. increased 15%.
ANSWER: d
39. In 2010, Acme Foods produced 300,000 bags of pretzels, employing 12,000 hours of labor. In
2011, it produced 322,000 bags of pretzels, employing 14,000 hours of labor. Acme Foods
productivity
a. decreased by 8%.
b. was unchanged.
c. increased by 6.8%.
d. increased by 7.3%.
ANSWER: a
NOTES: r
40. Dilbert’s Incorporated produced 5,000,000 units of accounting software in 2010. At the start of
2011 the pointy- haired boss reduced total annual hours of employment from 10,000 to 8,000 and
production was 4,800,000. These numbers indicate that productivity
a. fell by 4%.
b. fell by 20%.
c. rose by 12%.
d. rose by 20%.
ANSWER: d
41. Dilbert’s Incorporated produced 6,000,000 units of software in 2010. At the start of 2011 the
pointy-haired boss raised employment from 10,000 total annual hours to 14,000 annual hours and
production was 7,000,000 units. These number indicate that productivity
a. fell by about 16.7%.
b. stayed the same.
c. rose by about 16.7%.
d. rose by about 40%.
ANSWER: a
42. Last year the imaginary country of Basova had a population of 10,000, 6,000 people worked 8
hours a day, and produced a real GDP of $30,000,000. The imaginary country of Andovia had a
population of 12,000, 8,000 people worked 8 hours a day, and produced a real GDP of
$38,000,000. Which of the following is correct?
a. Basova had higher productivity and higher real GDP per person.
b. Andovia had the higher productivity and higher real GDP per person.
c. Basova had the higher productivity while Andovia had the higher real GDP per person.
d. Andovia had the higher productivity while Basova had the higher real GDP per person.
ANSWER: c
NOTES: r
43. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final
goods. Country B has a population of 2,000, of whom 1,800 work 6 hours a day to make 270,000
final goods.
a. Country A has higher productivity and higher real GDP per person than country B.
b. Country A has lower productivity and lower real GDP per person than country B.
c. Country A has higher productivity, but lower real GDP per person than country B.
d. Country B has lower productivity, but higher real GDP per person than country B.
ANSWER: b
44. Workland has a population of 10,000, of whom 7,000 work 8 hours a day to produce a total of
224,000 final goods. Laborland has a population of 5,000, of whom 3,000 work 7 hours a day to
produce a total of 105,000 final goods.
a. Workland has higher productivity and higher real GDP per person than Laborland.
b. Workland has higher productivity but lower real GDP per person than Laborland.
c. Workland has lower productivity but higher real GDP per person than Laborland.
d. Workland has lower productivity and lower real GDP per person than Laborland.
ANSWER: c
NOTES: r
45. Upland has a population of 15,000, of whom 9,000 work 8 hours a day to produce real output of
$342,000. Lowland has a population of 8,000, of whom 7,000 work 7 hours a day to produce real
output of $171,500.
a. Upland has higher productivity and higher real GDP per person than Lowland.
b. Upland has higher productivity but lower real GDP per person than Lowland.
c. Upland has lower productivity but higher real GDP per person than Lowland.
d. Upland has lower productivity and lower real GDP per person than Lowland.
ANSWER: a
46. Country A had a population of 1,000, of whom 600 worked an average of 8 hours a day and had a
productivity of 2.5. Country B had a population of 800, of whom 560 worked 8 hours a day and
had productivity of 3.0. Country
a. A had the higher level of real GDP and real GDP per person.
b. A had the higher level of real GDP and Country B had the higher level of real GDP per person
c. B had the higher level of real GDP and Country A had the higher level of real GDP per person
d. B had the higher level of real GDP and real GDP per person.
ANSWER: d
NOTES: r
47. Country A had a population of 2,000, of whom 1,300 worked an average of 8 hours a day and had
a productivity of 5.Country B had a population of 2,500, of whom 1,700 worked 8 hours a day and
had productivity of 4. Country
a. A had the higher level of real GDP and real GDP per person.
b. A had the higher level of real GDP and Country B had the higher level of real GDP per person
c. B had the higher level of real GDP and Country A had the higher level of real GDP per person
d. B had the higher level of real GDP and real GDP per person.
ANSWER: c
NOTES: n
Table 25-1.
Athens and Troy both produce only ribs and baked potatoes.
Athens Troy
Quantities
Ribs 200,000 300,000
Baked Potatoes 400,000 250,000
Base year prices
Ribs $10 $10
Baked Potatoes $4 $4
Population and Employment
Population 6,000 8,000
Total hours of employment 40,000 60,000
48. Refer to Table 25-1. Which of the following is correct?

a. Both real GDP and real GDP per person are higher in Athens than Troy.
b. Real GDP is higher in Athens while real GDP per person is higher in Troy
c. Real GDP is higher in Troy while real GDP per person is higher in Athens.
d. Both real GDP and real GDP per person are higher in Troy than Athens.
ANSWER: c
NOTES: r
49. Refer to Table 25-1. Which of the following is correct?

a. Both productivity and the standard of living are higher in Athens than Troy.
b. Productivity is higher in Athens while the standard of living is higher in Troy
c. Productivity is higher in Troy while the standard of living is higher in Athens.
d. Both productivity and the standard of living are higher in Troy than Athens.
ANSWER: a
TOPICS: DISC: Measuring Output
NOTES: r
50. Last year a country had 800 workers who worked an average of 8 hours and produced 12,800
units. This year the same country had 1000 workers who worked an average of 8 hours and
produced 14,000 units. This country’s productivity was
a. higher this year than last year. A possible source of this change in productivity is a change in
the size of the capital stock.
b. higher this year than last year. A change in the size of the capital stock does not affect
productivity.
c. lower this year than last year. A possible source of this change in productivity is a change in
the size of the capital stock.
d. lower this year than last year. A change in the size of the capital stock does not affect
productivity.
ANSWER: c
51. Both Arnold and Will work 10 hours a day. Arnold can produce six baskets of goods per hour
while Will can produce four baskets of the same goods per hour. It follows that Arnold’s
a. productivity is greater than Will’s.
b. output is greater than Will’s.
c. standard of living is higher than Will’s.
ANSWER: d
52. Each day Sue works 8 hours and produces 7 units of goods and services. Mary works 10 hours
each day and produces 10 units of goods and services. It follows that
a. Sue’s productivity is higher than Mary’s.
b. Mary’s productivity is higher than Sue’s.
c. Sue’s income per hour will be higher than Mary’s.
d. Sue’s income per day will be higher than Mary’s.
ANSWER: b
NOTES: r
53. Which of the following items plays a role in determining productivity?

a. physical capital
b. natural resources
c. technological knowledge
ANSWER: d
54. Industrial machinery is an example of

a. a factor of production that in the past was an output from the production process.
b. technological knowledge.
c. a production function.
d. an item which always has the property called constant returns to scale.
ANSWER: a
TOPICS: DISC: Factors of Production Capital
55. Industrial machinery is an example of

a. a factor of production that in the past was an output from the production process.
b. physical capital.
c. something that influences productivity.
ANSWER: d
TOPICS: DISC: Factor of Production
56. The Karmic Deed Restaurant uses all of the following to produce vegetarian meals. Which of
them is an example of physical capital?
a. the owner's knowledge of how to prepare vegetarian entrees
b. the money in the owner's account at the bank from which she borrowed money
c. the tables and chairs in the restaurant
d. the fresh fruits, vegetables, and grains the restaurant uses to prepare its meals
ANSWER: c
57. The equipment and structures available to produce goods and services are called
a. physical capital.
b. human capital.
c. the production function.
d. technology.
ANSWER: a
58. The saws, lathes, and drill presses that woodworkers at Cedar Valley Furniture use to produce
furniture are called
a. human capital.
c. natural resources.
d. technological knowledge.
ANSWER: b
59. Which of the following is not an example of physical capital?

a. a new factory building
b. a delivery van
c. the knowledge of workers
d. the office chair in a lawyer’s office
ANSWER: c
NOTES: r
60. Which of the following is an example of physical capital?

a. the strength of workers
b. on the job training
c. financial assets like cash and bonds
d. the equipment in a factory
ANSWER: d
NOTES: r

a. the computer a secretary uses
b. rivers on which goods are transported
c. the skills and knowledge of a doctor
ANSWER: a
NOTES: r

a. the available knowledge on how to make semiconductors
b. a taxi-cab driver’s knowledge of the fastest routes to take
c. bulldozers, backhoes and other construction equipment
ANSWER: c
63. Which of the following is an example of a produced factor of production?

a. a plant in which automobiles are assembled
b. skills that people accumulate in high school and college
c. skills that people accumulate through experience in the workplace
ANSWER: d
TOPICS: DISC: Factors of Production
64. Which of the following is an example of a produced factor of production?

a. corn that is harvested from a field in Iowa
b. workers who are hired at a coal mine in West Virginia
c. skills that teachers in Texas acquire through continuing-education classes
ANSWER: c
65. Human capital is the

a. knowledge and skills that workers acquire through education, training, and experience.
b. stock of equipment and structures that is used to produce goods and services.
c. total number of hours worked in an economy.
d. same thing as technological knowledge.
ANSWER: a
66. Which of the following is considered human capital? Knowledge acquired from
a. early childhood education programs
b. job training
c. on-the-job experience
ANSWER: d
67. Which of the following is an example of human capital?

a. a student loan
b. knowledge learned from reading books
c. training videos for new corporate employees
ANSWER: b
NOTES: r

a. the comfortable chair in your dorm room where you read economics texts
b. the amount you get paid each week to work at the library
c. the things you have learned this semester
d. any capital goods that require a human to be present to operate
ANSWER: c
69. Which of the following best illustrates the human capital of a survivor stranded on an island?
a. the fishing poles she has produced
b. the invention of a better fishing lure
c. the fresh fruit and fish on and around the island
d. her previous training in a survival course
ANSWER: d
70. Which of the following is a part of your economics professor's human capital?
a. the things she learned at some prestigious university
b. her copy of Mankiw's text
c. her chalk holder
ANSWER: a

a. textbooks
b. hand held power tools
c. knowing how to repair cars
ANSWER: c
72. Megan is a landscaper. Which of the following are included in her physical capital?
a. her knowledge of landscaping learned in college and her landscaping equipment
b. her knowledge of landscaping learned in college, but not her landscaping equipment
c. her landscaping equipment, but not her knowledge of landscaping learned in college
d. neither her knowledge of landscaping learned in college nor her landscaping equipment
ANSWER: c
NOTES: r
73. Ralph is a plumber. Which of the following are included in his human capital?
a. the knowledge he learned on the job, and the tools he uses
b. the knowledge he learned on the job, but not the tools he uses
c. the tools he uses, but not the knowledge he learned on the job
d. neither the knowledge he learned on the job nor the tools he uses
ANSWER: b
NOTES: r
74. Janet is a farmer. Which of the following are included in her human capital?
a. her tractor and what she’s learned from experience
b. her tractor but not what she’s learned from experience
c. what she’s learned from experience but not her tractor
d. neither her tractor nor what she’s learned from experience
ANSWER: c
NOTES: n
75. Which of the following are human capital and physical capital, respectively?
a. for an accounting firm: the accountants’ knowledge of tax laws and computer software
b. for a grocery store: grocery carts and shelving
c. for a school: chalkboard and desks
d. for a library: the building and the reference librarians’ knowledge of the Internet
ANSWER: a
76. Which of the following are human capital and physical capital, respectively?
a. for a brick layer: her bricks and her tools
b. for a gas station: the pumps and the cash register
c. for a restaurant: the chefs’ knowledge about preparing food and the equipment in the kitchen
d. for a medical office: the building and the doctors’ knowledge of medicine
ANSWER: c

a. By definition, all natural resources are nonrenewable.
b. Market prices give us reason to believe that natural resources are a limit to economic growth.
c. An economy must be blessed with ample quantities of natural resources if it is to be a highly
productive economy.
d. Differences in natural resources can explain some of the differences in standards of living
around the world.
ANSWER: d
TOPICS: DISC: Growth Theory Capital
78. The inputs into production of goods and services that are provided by nature, such as land, rivers,
and mineral deposits are called
a. physical capital.
b. natural resources.
c. human capital.
d. technological knowledge.
ANSWER: b
79. Japan’s status as a rich nation is attributable to

a. Japan’s quantities of natural resources, but not to international trade.
b. international trade, but not to Japan’s domestic quantities of natural resources.
c. the fact that Japanese productivity has remained nearly constant for more than 100 years.
d. the fact that the Japanese have downplayed the role of human capital in economic growth.
ANSWER: b
80. Natural resources

a. are inputs provided by nature.
b. include land, rivers, and mineral deposits.
c. take two forms: renewable and nonrenewable.
ANSWER: d
81. Which of the following is an example of a nonrenewable resource?

a. corn
b. oil
c. livestock
ANSWER: b
TOPICS: DISC : Factors of Production
NOTES: r
82. Which of the following is an example of a renewable natural resource?

a. fish
b. soybeans
c. wood
ANSWER: d
TOPICS: DISc : Factors of Production Renewable Resources
83. Which of the following is an example of a renewable natural resource?

a. the knowledge possessed by scientists
b. carpenters’ labor services
c. lumber
ANSWER: c
TOPICS: DISC: Factors of Production Renewable Resources
84. Which of the following is an example of a nonrenewable natural resource?

a. tin
b. petroleum
c. gold
ANSWER: d
85. In a market economy, the real, or inflation-adjusted, price of a resource measures its
a. contribution to revenue.
b. relative scarcity.
c. productivity.
d. contribution to efficiency.
ANSWER: b
TOPICS: DISC: Thinking Like an Economist Scarcity
86. In a market economy, scarcity of resources is most clearly reflected in

a. supply.
b. demand.
c. market prices.
d. the stock of the resource.
ANSWER: c
TOPICS: DISC : Thinking Like an Economist Scarcity
87. In a market economy, we know that a resource has become scarcer when
a. its price rises relative to other prices.
b. it is non-renewable and some of it is used.
c. people search for substitutes.
ANSWER: a
TOPICS: DISC: Thinking like an Economist Scarcity
88. In which of the following cases can we be certain that a natural resource has become scarcer?
a. both the demand for the resource and the supply of the resource have increased.
b. both the demand for the resource and the supply of the resource have decreased.
c. the demand for the resource has increased and the supply has decreased.
d. the demand for the resource has decreased and the supply has increased.
ANSWER: c
TOPICS: DISC: Thinking like an Economist Scarcity
89. In which of the following cases can we be certain that a natural resource has become scarcer?
a. both the demand for the resource and the supply of the resource have increased
b. both the demand for the resource and the supply of the resource have decreased
c. demand for the resource is unchanged and the supply of the resource has increased
d. the demand for the resource has decreased and the supply of the resource is unchanged
ANSWER: d
90. If the price of a good has risen over time,

a. it must have become more scarce.
b. it must have become less scarce.
c. it has become more scarce only if the price adjusted for inflation has risen.
d. it has become less scarce only if the price adjusted for inflation has risen.
ANSWER: c
91. If a good has become more scarce, then we know for sure that
a. the demand for it increased.
b. the supply of it decreased.
c. either the demand for it increased or the supply of it decreased.
d. both the supply of it and the demand for it decreased.
ANSWER: c
92. Greater scarcity of a natural resource is indicated

a. by an increase in the price of the resource, whether the price increase is less than or greater
than the rate of inflation.
b. only by an increase in the price of the resource that is less than the rate of inflation.
c. only by an increase in the price of the resource that is greater than the rate of inflation.
d. only by an increase in the price of the resource that is caused by a decrease in supply and is
greater than the rate of inflation.
ANSWER: c
93. Suppose that in some country the price of silver increased from $30 per ounce to $31 per ounce
during a time when the overall price level increased by 5 percent. During this period, the real price
of silver
a. increased.
b. decreased.
c. stayed the same.
d. might have increased, decreased or stayed the same; more information is needed to be sure.
ANSWER: b
TOPICS: DISc : Price Level Concepts Inflation
NOTES: r
94. Suppose over the last five years that the price of recycled aluminum increased from $800 a ton to
$900 a ton. Over the same time a measure of the overall price level increased from 120 to 138.
The real price of recycled aluminum
a. increased, so it became scarcer
b. increased, so it became less scarce
c. decreased, so it became scarcer
d. decreased, so it became less scarce
ANSWER: d
TOPICS: DISC: Price Level Concepts Inflation
NOTES: r
95. Suppose over the last year that the price of iron ore increased from $1,200 a ton to $1,275 a ton.
Over the same time a measure of the overall price level increased from 150 to 156. The price of
iron ore increased by
a. less than inflation, so it became less scarce.
b. less than inflation, so it became more scarce.
c. more than inflation, so it became more scarce.
d. more than inflation, so it became less scarce.
ANSWER: c
NOTES: r
96. Suppose that over the last year the price of copper increased from $1.70 a pound to $1.79 per
pound. Over the same time a measure of the overall price level increased from 300 to 309. The
price of copper increased by
a. less than inflation, and this means it became relatively less scarce.
b. less than inflation, and this means it became scarcer.
c. more than inflation, and this means it became scarcer.
d. more than inflation, but this doesn’t necessarily mean that it become scarcer.
ANSWER: c
97. If an inexpensive alternative to oil were found, the price of oil adjusted for inflation
a. would decline as the alternative would reduce the demand for oil.
b. would decline as the alternative would reduce the supply of oil.
c. would increase as the alternative would increase the demand for oil.
d. would increase as the alternative would increase the supply of oil.
ANSWER: a
98. Historically, the market prices of most natural resources (adjusted for inflation) have
a. increased.
b. remained stable.
c. remained stable or decreased.
d. decreased.
ANSWER: c
99. The behavior of market prices over time indicates that natural resources are
a. a limit to economic growth.
b. unrelated to economic growth.
c. not a limit to economic growth.
d. the major determinant of productivity.
ANSWER: c
100. The notion that our ability to conserve natural resources is growing more rapidly than their
supplies are dwindling is supported by the fact that
a. most economists do not regard the availability of natural resources as a determinant of
productivity.
b. the quantity of natural resources does not enter into any production function.
c. inflation-adjusted prices of most natural resources have been stable or fallen over time.
d. inflation-adjusted prices of most natural resources have risen over time.
ANSWER: c

a. Once adjustment is made for inflation, the prices of most natural resources have been about
steady or falling.
b. Technological progress has allowed us to substitute renewable resources for some
nonrenewable resources.
c. Technological progress has made once-crucial natural resources less necessary.
ANSWER: d
102. After adjusting for inflation, over time the prices of most natural resources have been
a. steady or falling, meaning that our ability to conserve them is growing more rapidly than their
supplies are dwindling.
b. steady or falling, meaning that their supplies are dwindling more rapidly than our ability to
conserve them is growing.
c. rising, meaning that our ability to conserve them is growing more rapidly than their supplies are
dwindling.
d. rising, meaning that their supplies are dwindling more rapidly than our ability to conserve them
is growing.
ANSWER: a
103. If natural resources had become scarcer, then we would expect their
a. prices to have risen more than inflation as they have.
b. prices to have risen more than inflation, but they have not.
c. known quantities to have fallen as they have.
d. known quantities to have fallen but they have not.
ANSWER: b
104. A leading environmental group recently published a report contending that humans are running a
"resource deficit" because we are using natural resources faster than they can be regenerated.
The group claims that this means that economic growth will eventually stop, and will even be
reversed. An economist would
a. agree with the report, and would point to rising natural resource prices as evidence.
b. agree with the report, but wouldn't think it was important because growth will not slow down
for several centuries.
c. disagree with the report, in part because it ignores the mitigating effects of technological
change.
d. disagree with the report because labor and capital are the primary determinants of growth,
and since they are plentiful, growth will not slow down.
ANSWER: c
TOPICS: DISC: Growth Theory Technology
105. Despite its status as one of the richest countries in the world, Japan
a. has a very low level of productivity.
b. has few natural resources.
c. has very little human capital.
d. engages in a relatively small amount of international trade.
ANSWER: b
106. Which of the following best states economists' understanding of the facts concerning the
relationship between natural resources and economic growth?
a. A country with no or few domestic natural resources is destined to be poor.
b. Differences in natural resources have virtually no role in explaining differences in standards of
living.
c. Some countries can be rich mostly because of their natural resources and countries without
natural resources need not be poor, but can never have very high standards of living.
d. Abundant domestic natural resources may help make a country rich, but even countries with
few natural resources can have high standards of living.
ANSWER: d
TOPICS: DISC: Thinking Like an Economist
107. An understanding of the best ways to produce goods and services is called
a. human capital.
c. technology.
d. productivity.
ANSWER: c
TOPICS: DISC: Producer Theory Technology
108. Technological knowledge refers to

a. human capital.
b. available information on how to produce things.
c. resources expended transmitting society's understanding to the labor force.
d. All of the above are technological knowledge.
ANSWER: b
TOPICS: DISC: Producer theory Technology
109. Technological knowledge

a. is the same thing as human capital.
b. can be discovered but it can never be kept secret.
c. is a determinant of productivity.
d. does not play a role in the relationship that economists call the production function.
ANSWER: c
TOPICS: DISC: Producer Theory Technology
110. Proprietary technology is knowledge that is

a. known but no longer used much.
b. known, but only recently discovered.
c. known mostly by only those in a certain profession.
d. known only by the company that discovered it.
ANSWER: d
TOPICS: DISC: Public Economics Property Rights
111. Proprietary technology is technology that is

a. widely used because it is easy to learn.
b. widely used because the government subsidizes its use.
c. not widely used because people could, but have not, taken the time to learn how to apply it.
d. not widely used because it is known or controlled only by the company that discovered it.
ANSWER: d
112. Proprietary technology is technology

a. that the government prohibits firms from using.
b. conserves natural resources.
c. that is useful while other types of technology are outdated.
d. that is known or controlled only by the company that discovered it.
ANSWER: d
NOTES: n
113. Human capital is

a. the same thing as technological knowledge.
b. the same thing as labor.
c. the tools and equipment operated by humans.
d. knowledge and skills that workers have acquired.
ANSWER: d
114. Human capital

a. can be thought of, metaphorically, as the quality of society’s textbooks, whereas technological
knowledge
can be thought of as the time that the population has devoted to reading textbooks.
b. is more tangible than physical capital.
c. is an input in the production of goods and services.
d. is the same as the quantity of labor.
ANSWER: c
115. Perry accumulated a lot of mathematical skills while in high school, college, and graduate school.
Economists
include these skills as part of Perry’s
a. proprietary knowledge.
b. technological knowledge.
c. human capital.
d. physical capital.
ANSWER: c
NOTES: r
116. Matt is going to college to become a pharmacist. What he learns about existing information
increases
a. both technological knowledge and human capital.
b. technological knowledge but not human capital.
c. human capital but not technological knowledge.
d. neither technological knowledge nor human capital.
ANSWER: c
NOTES: r
117. A management professor discovers a way for corporate management to operate more
efficiently. He publishes his findings in a journal. His findings are
a. proprietary and common knowledge.
b. common, but not proprietary, knowledge.
c. proprietary, but not common, knowledge.
d. neither proprietary nor common knowledge.
ANSWER: b
118. Your company discovers a better way to produce mousetraps, but your better methods are not
apparent from the mousetraps themselves. Your knowledge of how to more efficiently produce
mousetraps is
a. common technological knowledge.
b. common, but not technological, knowledge.
c. proprietary technological knowledge.
d. proprietary, but not technological, knowledge.
ANSWER: c
119. A professor at a university finds a way to reduce the costs of producing automobile glass. The
method is very easy for anyone to copy. A company develops a substance which prevents
eyeglasses from smudging. It receives a patent on the formula. Which of these are common
technological knowledge?
a. the method to reduce costs of producing automobile glass, and the formula for the substance
that prevents smudging
b. the method to reduce costs of producing automobile glass, but not the formula for the
substance that prevents smudging
c. the formula for the substance that prevents smudging, but not the method to reduce costs of
producing automobile glass
d. neither the method to reduce costs of producing automobile glass nor the formula for the
substance that prevents smudging
ANSWER: b
120. Apple founder Steve Jobs received patents on many of his ideas. While the patents existed, his
ideas were
a. public goods and proprietary knowledge.
b. public goods but not proprietary knowledge.
c. private goods and proprietary knowledge.
d. private goods but not proprietary knowledge.
ANSWER: c
NOTES: r
121. Amy discovers a way to produce water heaters so they are less expensive and use less natural
gas. Amy’s discovery is
a. physical capital. If Amy’s discovery leads to lower natural gas prices, it has made natural gas
less scarce.
b. physical capital. If Amy’s discovery leads to lower natural gas prices, it has made natural gas
scarcer.
c. technological knowledge. If Amy’s discovery leads to lower natural gas prices, it has made
natural gas less scarce.
d. technological knowledge. If Amy’s discovery leads to lower natural gas prices, it has made
natural gas scarcer.
ANSWER: c
NOTES: n
122. Which of the following statements about inputs is correct?

a. A forest is an example of a natural resource; it is also an example of a renewable resource.
b. There is no distinction between human capital and technological knowledge.
c. Human capital is a non-produced factor of production.
d. Physical capital is a non-produced factor of production.
ANSWER: a

a. Natural resources per worker influence productivity only when those natural resources are
renewable.
b. The prices of most natural resources are stable or falling relative to other prices.
c. Technology requires greater use of natural resources.
d. The terms human capital and technological knowledge are used interchangeably.
ANSWER: b

a. The quantity of natural resources per worker can influence productivity.
b. Technological knowledge and human capital are closely related.
c. Over long periods of time, the prices of most natural resources are stable or falling, relative to
other prices.
ANSWER: d
125. Which of the following lists contains, in this order, natural resources, human capital, and physical
capital?
a. For a restaurant: the land the restaurant was built on, the money it borrowed to buy supplies,
the freezers where the chops and steaks are kept.
b. For a furniture company: wood, the skills and knowledge of its workers, saws.
c. For a railroad: fuel, railroad engines, railroad tracks.
ANSWER: b
NOTES: r
126. Which of the following lists contains, in this order, natural resources, physical capital, and human
capital?
a. For a shoe factory: leather, hand tools, the managers’ knowledge of shoe making.
b. For a steel mill: the blast furnaces, iron ore, the workers.
c. For an airline: oil used to make jet fuel, the pilots’ knowledge of flying, jets.
ANSWER: a
NOTES: r
127. Other things the same, which of the following would increase productivity?
a. an increase in either human or physical capital
b. an increase in human capital but not an increase in physical capital
c. an increase in physical capital but not an increase in human capital
d. neither an increase in human capital nor an increase in physical capital
ANSWER: a
128. Which of the following would increase productivity?

a. an increase in the physical capital stock per worker
b. an increase in human capital per worker
c. an increase in natural resources per worker
ANSWER: d
129. Which of the following is a determinant of productivity?

a. human capital per worker
b. physical capital per worker
c. natural resources per worker
ANSWER: d
130. Which of the following is a determinant of productivity?

a. human capital per worker
b. physical capital per worker
c. natural resources per worker
ANSWER: d

a. Productivity is a determinant of human capital per worker.
b. Technological knowledge is a determinant of productivity.
c. Human capital and technological knowledge are the same thing.
ANSWER: b
132. Country A has twice as many workers as Country B. Country A also has twice as much
physical capital, twice as much human capital, and access to twice as many natural resources as
Country B. Assuming constant-returns to scale, which of the following is higher in Country A?
a. both output per worker and productivity
b. output per worker but not productivity
c. productivity but not output per worker
d. neither productivity nor output per worker
ANSWER: d
NOTES: n
133. Suppose a country imposes new restrictions on how many hours people can work. If these
restrictions reduce the total number of hours worked in the economy, but all other factors that
determine output are held fixed, then
a. productivity and output both rise.
b. productivity rises and output falls.
c. productivity falls and output rises.
d. productivity and output fall.
ANSWER: b
134. Suppose a country reduces restrictions on how many hours people can work. If reducing these
restrictions increase the total number of hours worked in the economy, but all other factors that
determine output are held fixed, then
a. productivity and output both rise.
b. productivity rises and output falls.
c. productivity falls and output rises.
d. productivity and output fall.
ANSWER: c
NOTES: n
135. Other things the same, which of the following could explain an increase in productivity?
a. either an increase in human capital or an increase in physical capital
b. an increase in human capital but not an increase in physical capital
c. an increase in physical capital but not an increase in human capital
d. neither an increase in human capital nor an increase in physical capital
ANSWER: a
136. In the equation for the production function Y/L represents

a. productivity.
b. output.
c. the availability of natural resources.
d. the amount of human capital.
ANSWER: a
TOPICS: DISC: Producer Theory Production Function
137. In the equation for the production function H/L represents

a. natural resources per worker.
b. human capital per worker.
c. output per worker.
d. physical capital per worker.
ANSWER: b
138. In a particular production process, if the quantities of all inputs used double, then the quantity of
output doubles as well. This means that
a. the production process cannot be enhanced by technological advances.
b. no mathematical representation of the relevant production function can be formulated.
c. the relevant production function has the limits-to-growth property.
d. the relevant production function has the constant-returns-to-scale property.
ANSWER: d
139. If your firm’s production function has constant returns to scale, then if you double all your inputs,
your firm's output will
a. double and productivity will rise.
b. double but productivity will not change.
c. more than double and productivity will rise.
d. more then double but productivity will not change.
ANSWER: b
140. If your firm’s production function has constant returns to scale, and if you double all your inputs,
then your firm's productivity will
a. not change.
b. increase but not double.
c. double.
d. more than double.
ANSWER: a
141. In a particular production process, if the quantities of all inputs used are increased by 60%, then
the quantity of output increases by 60% as well. This means that
a. the production process cannot be enhanced by technological advances.
b. no mathematical representation of the relevant production function can be formulated.
c. the relevant production function has the limits-to-growth property.
d. the relevant production function has constant-returns-to-scale.
ANSWER: d
142. If your firm’s production function has constant returns to scale and you increase all your inputs
by 60%, then your firm's output will
a. not change.
b. increase, but by less than 60%
c. increase by 60%
d. increase by more than 60%.
ANSWER: c
143. You bake cookies. One day you double the time you spend, double the number of chocolate
chips, flour, eggs, and all your other inputs, and bake twice as many cookies. Your cookie
production function has
a. decreasing returns to scale.
b. zero returns to scale.
c. constant returns to scale.
d. increasing returns to scale.
ANSWER: c
144. You sell cupcakes. One day you double the time you spend and double all your inputs, and make
twice as many cupcakes. Your cupcake production function has
a. decreasing returns to scale.
b. zero returns to scale.
c. constant returns to scale.
d. increasing returns to scale.
ANSWER: c
NOTES: r
145. If there are constant returns to scale, the production function can be written as
a. xY = 2xAF(L, K, H, N).
b. Y/L = A F(xL, xK, xH, xN).
c. Y/L = A F( 1, K/L, H/L, N/L).
d. L = AF(Y, K, H, N).
ANSWER: c
146. If a production function has constant returns to scale, output can be doubled if
a. labor alone doubles.
b. all inputs but labor double.
c. all of the inputs double.
ANSWER: c
147. Suppose there are constant returns to scale. Now suppose that over time a country doubles its
workers, its natural resources, its physical capital, and its human capital, but its technology is
unchanged. Which of the following would double?
a. both output and productivity
b. output, but not productivity
c. productivity, but not output
d. neither productivity nor output
ANSWER: b
148. An economy’s production function has the constant-returns-to-scale property. If the economy’s
labor force doubled
and all other inputs stayed the same, then real GDP would
a. stay the same.
b. increase by exactly 50 percent.
c. increase by exactly 100 percent.
d. increase, but not necessarily by either 50 percent or 100 percent.
ANSWER: d
149. If the number of workers in an economy doubled, all other inputs stayed the same, and there
were constant returns to scale, productivity would
a. fall to less than one-half of its former value.
b. fall, but it would still be greater than one-half of its former value.
c. stay the same.
d. rise but less than double.
ANSWER: b
150. If an economy with constant returns to scale were to double its physical capital stock, its
available natural resources, and its human capital, but leave the size of the labor force the same,
a. its output would stay the same and so would its productivity.
b. its output and productivity would increase, but less than double.
c. its output and productivity would increase by more than double.
ANSWER: b
151. A certain production process requires only two types of inputs — capital and labor. In 2006, 100
units of labor and 50 units of capital were employed, and 100 units of output were produced. In
2013, 112 units of labor and 56 units of capital were employed. If the production process displays
constant returns to scale, then how many units of output were produced in 2013?
a. 100
b. 112
c. 124
d. 144
ANSWER: b
NOTES: r
152. In the production function , which symbol reflects the state of technology?
a. A
b. K
c. H
d. N
ANSWER: a
Scenario 25-1. An economy’s production form takes the form Y = AF(L, K, H, N).
153. Refer to Scenario 25-1. K represents the quantity of

a. human capital only.
b. physical capital only.
c. human capital and physical capital combined.
d. nonrenewable natural resources.
ANSWER: b
154. Refer to Scenario 25-1. In the production function, which of the following represents
technology?
a. A
b. K
c. H
d. N
ANSWER: a
155. Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property,
then it can be rewritten as
a. Y/L = AF(1, K/L, H/L, N/L)
b. Y/L = AF(L, 1, H/L, N/L)
c. Y/L = AF(L, K/L, 1, N/L)
d. Y/L = AF(L, K/L, H/L, 1)
ANSWER: a
then if we know the values of A, K/L, H/L, and N/L, we also know the value of
a. output.
b. labor productivity.
c. A.
ANSWER: b
then it is possible that the specific form of the production function is
a. Y = 4L + 2K + 3H + N
b. Y = (L + K + H + N)/4
c. Y =2
d. Y = 4
ANSWER: c

a. Growth of productivity is the main determinant of growth in living standards.
b. Common knowledge and proprietary technology are both important for the economy’s
production of goods and services.
c. The terms capital and physical capital refer to the same thing.
ANSWER: d
TOPICS: DISC: Growth Theory Growth
a. Human capital per worker is a determinant of productivity.
b. A nation cannot be highly productive in producing goods and services without abundant
quantities of natural resources.
c. Human capital and technological knowledge are the same thing.
d. All technological knowledge is proprietary.
ANSWER: a
160. A basic principle of economics is that a country’s standard of living depends on its
a. quantity of physical capital.
b. abundance of natural resources.
c. ability to produce goods and services.
d. ability to thrive economically without having to interact with other countries.
ANSWER: c
161. In order for the standard of living within a country to be enhanced over time, which of the
following is essential?
a. The role of the country’s government in the economy must become larger.
b. The population of the country must increase.
c. More domestic natural resources must be discovered and used.
d. The level of productivity must increase.
ANSWER: d
Multiple Choice – Section 03: Economic Growth and Public Policy
1. Consider three imaginary countries. In Aziria, saving amounts to $3,000 and consumption amounts
to $7,000; in Graniva, saving amounts to $2,000 and consumption amounts to $8,000; and in
Tanistan, saving amounts to $4,500 and consumption amounts to $10,500. The saving rate is
a. higher in Aziria than in Tanistan, and it is higher in Tanistan than in Graniva.
b. higher in Graniva than in Tanistan, and it is higher in Tanistan than in Aziria.
c. higher in Tanistan than in Graniva, and it is the same in Graniva and Aziria.
d. higher in Aziria than in Graniva, and it is the same in Aziria and Tanistan.
ANSWER: d
TOPICS: DISC: Consumption, Saving, and Investment Saving
2. Consider three imaginary countries. In Aire, saving amounts to $4,000 and consumption amounts to
$12,000; in Bovina, saving amounts to $3,000 and consumption amounts to $24,000; and in Cartar,
saving amounts to $10,000 and consumption amounts to $50,000. The saving rate is
a. higher in Aire than in Cartar, and it is higher in Cartar than in Bovina.
b. higher in Cartar than in Aire, and it is higher in Aire than in Bovina.
c. higher in Cartar than in Bovina, and it is the same in Bovina and Aire.
d. higher in Aire than in Bovina, and it is the same in Aire and Cartar.
ANSWER: a
NOTES: r
3. One of the Ten Principles of Economics in Chapter 1 is that people face tradeoffs. The growth that
arises from capital accumulation is not a free lunch. It requires that society
a. conserve resources for future generations.
b. sacrifice consumption goods and services now in order to enjoy more consumption in the future.
c. recycle resources so that future generations can produce goods and services with the
accumulated capital.
ANSWER: b
TOPICS: DISC: Consumption, Saving, and Investment Investment
4. In an economy where net exports are zero, if saving rises in some period, then in that period
a. consumption and investment fall.
b. consumption falls and investment rises.
c. consumption rises and investment falls.
d. consumption rises and investment falls.
ANSWER: b
TOPICS: DISC: Consumption, Saving, and Investment
5. Other things the same, when an economy increases its saving rate
a. consumption and production rise now.
b. consumption rises now and production rises later
c. consumption falls now and production rises later.
d. consumption falls now and production falls later.
ANSWER: c
TOPICS: DISC: Consumption, Saving, and Investment
6. When a society decides to increase its quantity of physical capital, the society
a. can avoid the usual need to face trade-offs.
b. is apparently not very concerned about its rate of economic growth in the future.
c. is in effect deciding to consume fewer goods and services in the present.
d. is in effect deciding to save less of its current income in the present.
ANSWER: c
7. Accumulating capital
a. requires that society sacrifice consumption goods in the present.
b. allows society to consume more in the present.
c. decreases saving rates.
d. involves no tradeoffs.
ANSWER: a
8. “When workers already have a large quantity of capital to use in producing goods and services,
giving them an additional unit of capital increases their productivity only slightly.” This statement
a. represents the traditional view of the production process.
b. is an assertion that capital is subject to diminishing returns.
c. is made under the assumption that the quantities of human capital, natural resources, and
technology are being held constant.
ANSWER: d
TOPICS: DISC : Producer Theory
9. “When workers already have a large quantity of capital to use in producing goods and services,
giving them an additional unit of capital increases their productivity only slightly.” This statement
a. represents an unconventional view of the production process.
b. is an assertion that capital is subject to increasing returns.
c. is made under the assumption that the quantities of human capital, natural resources, and
technology are being held constant.
ANSWER: c
10. “When workers have a relatively small quantity of capital to use in producing goods and services,
giving them an additional unit of capital increases their productivity by a relatively large amount.”
This statement
a. is an assertion that production functions have the property of constant returns to scale.
b. is consistent with the view that capital is subject to diminishing returns.
c. is inconsistent with the view that it is easier for a country to grow fast if it starts out relatively
poor.
ANSWER: b
TOPICS: DISC: Producer Theory
11. The traditional view of the production process is that capital is subject to
a. constant returns.
b. increasing returns.
c. diminishing returns.
d. diminishing returns for low levels of capital, and increasing returns for high levels of capital.
ANSWER: c
12. If there are diminishing returns to capital, then

a. capital produces fewer goods as it ages.
b. old ideas are not as useful as new ones.
c. increases in the capital stock eventually decrease output.
d. increases in the capital stock increase output by ever smaller amounts.
ANSWER: d
13. All else equal, if there are diminishing returns, then which of the following is true if a country
increases its capital by one unit?
a. Output will rise by more than it did when the previous unit was added.
b. Output will rise but by less than it did when the previous unit was added.
c. Output will fall by more than it did when the previous unit was added.
d. Output will fall but by less then it did when the previous unit was added.
ANSWER: b
14. All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last
year and by 100 units this year,
a. the increase in output was greater for this year than last year.
b. the increase in output was greater last year than this year.
c. the increase in output is the same in both years.
d. None of the above is necessarily correct.
ANSWER: b
15. Country A and country B are the same except country A currently has more capital. Assuming
diminishing returns, if both countries increase their capital by 100 units and other factors that
determine output are unchanged, then
a. output in country A increases by more than in country B.
b. output in country A increases by the same amount as in country B.
c. output in country A increases by less than in country B.
d. None of the above is necessarily correct.
ANSWER: c
TOPICS: DISC: Growth Theory Convergence
NOTES: r
16. Country A and country B both increase their capital stock by one unit. Output in country A
increases by 12 while output in country B increases by 15. Other things the same, diminishing
returns implies that country A is
a. richer than Country B. If Country A adds another unit of capital, output will increase by more
than 12 units.
b. richer than Country B. If Country A adds another unit of capital, output will increase by less
than 12 units.
c. poorer than Country B. If Country A adds another unit of capital, output will increase by more
than 12 units.
d. poorer than Country B. If Country A adds another unit of capital, output will increase by less
than 12 units.
ANSWER: b
NOTES: r
17. Country A and country B both increase their capital stock by one unit. Output in country A
increases by 10 while output in country B increases by 8. Other things the same, diminishing
returns implies that country A is
a. richer than Country B. If Country A adds another unit of capital, output will increase by more
than 10 units.
b. richer than Country B. If Country A adds another unit of capital, output will increase by less
than 10 units.
c. poorer than Country B. If Country A adds another unit of capital, output will increase by more
than 10 units.
d. poorer than Country B. If Country A adds another unit of capital, output will increase by less
than 10 units.
ANSWER: d
NOTES: n
18. On a production function, as capital per worker increases, output per worker
a. increases. This increase is larger at larger values of capital per worker.
b. increases. This increase is smaller at larger values of capital per worker.
c. decreases. This decrease is larger at larger value of capital per worker.
d. decreases. This decrease is smaller at larger value of capital per worker.
ANSWER: b
19. According to the traditional view of the production function, which of the following values of the
additions to output per worker would be consistent with moving from 5 to 6, and then from 6 to 7,
and then from 7 to 8 units of capital per worker in that order?
a. 40, 40, 40
b. 40, 35, 38
c. 40, 34, 32
d. 40, 43, 48
ANSWER: c
NOTES: n
20. All else equal, if there are diminishing returns, then what happens to productivity if both capital
and labor increase?
a. Productivity will definitely fall.
b. Productivity will definitely be unchanged.
c. Productivity will definitely rise.
d. None of the above are necessarily correct.
ANSWER: d
21. All else equal, if there are diminishing returns and constant returns to scale, then what happens to
productivity if capital and labor both increase but capital increases by more?
a. Productivity will definitely fall.
b. Productivity will definitely be unchanged.
c. Productivity will definitely rise.
d. None of the above are necessarily correct.
ANSWER: c
NOTES: n
22. The slope of the production function with capital per worker on the horizontal axis and output per
worker on the vertical axis
a. is positive and gets steeper as capital per worker rises.
b. is positive and gets flatter as capital per worker rises.
c. is negative and gets steeper as capital per worker rises.
d. is negative and gets flatter as capital per worker rises.
ANSWER: b
Figure 25-1.
On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L
represents output (Y) per worker (L).
23. Refer to Figure 25-1. The curve becomes flatter as the amount of capital per worker increases
because of
a. increasing returns to capital.
b. increasing returns to labor.
c. diminishing returns to capital.
d. diminishing returns to labor.
ANSWER: c
24. Refer to Figure 25-1. The shape of the curve is consistent with which of the following
statements about the economy to which the curve applies?
a. In the long run, a higher saving rate leads to a higher level of productivity.
b. In the long run, a higher saving rate leads to a higher level of income.
c. In the long run, a higher saving rate leads to neither a higher growth rate of productivity nor a
higher growth rate of income.
ANSWER: d
TOPICS: DISC: Consumption,Saving,and Investment Saving
25. Refer to Figure 25-1. The shape of the curve is consistent with which of the following
statements about the economy to which the curve applies?
a. In the long run, a higher saving rate leads to a higher growth rate of productivity.
b. In the long run, a higher saving rate leads to a higher growth rate of income.
c. Returns to capital become increasingly smaller as the amount of capital per worker increases.
ANSWER: c
TOPICS: DISC : Consumption, Saving, and Investment Saving
26. Refer to Figure 25-1. Choose a point anywhere on the curve and call it point A. If the economy
is at point A in 2011, then it will definitely remain at point A in 2012 if, between 2011 and 2012,
a. the quantity of physical capital remains constant; the number of workers doubles; and human
capital, natural resources, and technology all double as well.
b. the quantity of physical capital doubles; human capital, natural resources, and technology all
double as well; and the number of workers remains constant.
c. the quantity of physical capital doubles; the number of workers doubles; and human capital,
natural resources, and technology all double as well.
d. the quantity of physical capital doubles; the number of workers doubles; and human capital,
natural resources, and technology remain constant.
ANSWER: d
TOPICS: DISC: Growth Theory
27. Other things the same, a country that increases its saving rate increases
a. its future productivity and future real GDP.
b. neither its future productivity nor future real GDP.
c. its future productivity, but not its future real GDP.
d. its future real GDP, but not its future productivity.
ANSWER: a
28. If a country's saving rate increases, then in the long run

a. productivity is higher but real GDP per person is not higher.
b. real GDP per person is higher but productivity is not higher.
c. productivity and real GDP per person are both higher.
d. neither productivity nor real GDP per person is higher.
ANSWER: c
29. Other things the same, a country that increases its savings rate will have
a. higher future capital and higher future real GDP per person.
b. higher future capital but not higher future real GDP per person.
c. higher future real GDP per person but not higher future capital.
d. neither higher future capital nor higher future real GDP per person.
ANSWER: a
30. Currently a country has real GDP per person of 500. Raising capital per worker by one would
increase output per worker by 4. Other things the same, which of the following long-run
combinations are consistent with the effects of this country increasing its saving rate?
a. real GDP per person is 520 and raising capital per worker by one would increase output per
worker by 3
b. real GDP per person is 520 and raising capital per worker by one would increase output per
worker by 5
c. real GDP per person is 480 and raising capital per worker by one would increase output per
worker by 3
d. real GDP per person is 480 and raising capital per worker by one would increase output per
worker by 5
ANSWER: a
DIFFICULTY: Difficulty: Difficulty: Challenging
NOTES: n
31. In the long run, a higher saving rate

a. cannot increase the capital stock.
b. means that people must consume less in the future.
c. increases the level of productivity.
ANSWER: c
32. In the long run, an increase in the saving rate

a. doesn’t change the level of productivity or income.
b. raises the levels of both productivity and income.
c. raises the level of productivity but not the level of income.
d. raises the level of income but not the level of productivity.
ANSWER: b
TOPICS: DISC: Consumer, Saving, and Investment Saving
33. In the long run, a higher saving rate

a. cannot increase the capital stock.
b. increases the growth rate of income.
c. increases the growth rate of productivity.
ANSWER: d
34. Other things the same, if a country raises its saving rate, then in the long run
a. both the level and growth rate of real GDP are unchanged.
b. the level of real GDP is higher but the growth rate of real GDP is unchanged.
c. both the level and growth rate of real GDP are higher.
ANSWER: b
35. Other things the same, if a country raises its saving rate, when is productivity growth higher?
a. as the economy moves toward the long run and in the long run.
b. as the economy moves toward the long run, but not in the long run.
c. in the long run, but not as the economy moves toward the long run.
d. neither as the economy moves toward the long run, nor in the long run.
ANSWER: b
36. Other things the same, if a country raises its saving rate, when is growth of real GDP per person
higher?
a. as the economy moves toward the long run and in the long run.
b. as the economy moves toward the long run, but not in the long run.
c. in the long run, but not as the economy moves toward the long run.
d. neither as the economy moves toward the long run, nor in the long run.
ANSWER: b
37. If a country were to increase its saving rate, then in the long run it would also increase its
a. level of income.
b. growth rate of income.
c. growth rate of productivity.
ANSWER: a
38. If a country increases its saving rate, which of the following permanently grow at a higher rate?
a. productivity and real GDP per person
b. productivity but not real GDP per person
c. real GDP per person but not productivity
d. neither real GDP per person nor productivity
ANSWER: d
39. Suppose that a country increased its saving rate. In the long run it would have
a. higher productivity, and another unit of capital would increase output by more than before.
b. higher productivity, but another unit of capital would increase output by less than before.
c. lower productivity, and another unit of capital would increase output by more than before.
d. lower productivity, but another unit of capital would increase output by less than before.
ANSWER: b
40. If a country’s saving rate declined, then other things the same, in the long run the country would
have
a. lower productivity, but not lower real GDP per person.
b. lower productivity and lower real GDP per person.
c. lower real GDP per person, but not lower productivity
d. neither lower productivity nor lower real GDP per person.
ANSWER: b
41. Suppose Turkey increases its saving rate. In the long run
a. the growth rates of productivity and real GDP per person increase.
b. productivity and real GDP per person increase.
c. the growth rate of productivity increases, and real GDP per person increases.
d. productivity increases, and the growth rate of real GDP per person increases.
ANSWER: b
42. Other things the same, if a country increased its saving rate, in 40 years or so it would likely have
a. higher productivity, and a higher growth rate of real GDP.
b. higher productivity, but not a higher growth rate of real GDP.
c. the same productivity and growth of real GDP it began with.
ANSWER: b
43. Which of the following best describes the response of output as time passes to an increase in the
saving rate?
a. The growth rate of output does not change.
b. The growth rate of output increases and gets even larger as time passes.
c. The growth rate of output increases and does not change as time passes.
d. The growth rate of output increases, but diminishes to its former level as time passes.
ANSWER: d
44. According to studies using international data, an increase in the saving rate
a. does not increase the growth rate of output.
b. increases the growth rate of output for a few years.
c. increases the growth rate of output for about a decade.
d. increases the growth rate of output for several decades.
ANSWER: d
45. Suppose that the U.S. undertakes a policy to increase its saving rate. This policy will likely
a. have no impact on the growth rate of real GDP per person.
b. decrease the growth of real GDP per person for a few years.
c. increase the growth of real GDP per person for several decades.
d. permanently increase the growth rate of real GDP per person.
ANSWER: c
NOTES: r
46. Suppose that the U.S. undertakes a policy to increase its saving rate. This policy will likely
a. have no impact on the level of real GDP per person.
b. immediately and permanently decrease the level of real GDP per person.
c. immediately and permanently increase the level of real GDP person.
d. gradually raise the level of real GDP per person.
ANSWER: d
NOTES: n
47. The short-run effects of an increase in the saving rate include

a. a higher level of productivity.
b. a higher growth rate of productivity.
c. a higher growth rate of income.
ANSWER: d
48. The long-run effects of an increase in the saving rate include

a. a higher level of productivity.
b. a higher growth rate of productivity.
c. a higher growth rate of income.
ANSWER: a
49. Suppose an economy experiences an increase in its saving rate. The higher saving rate leads to a
higher growth rate of productivity
a. in the short run, but not in the long run.
b. in the long run, but not in the short run.
c. in both the short run and the long run.
d. in neither the short run nor the long run.
ANSWER: a
50. Suppose that there are diminishing returns to capital. Suppose also that two countries are the
same except one has more capital per worker and so it has more real GDP per worker than the
other. Finally, suppose that the saving rate in both countries increases from 4 percent to 7
percent. Over the next ten years we would expect that
a. the growth rate will not change in either country.
b. the country that started with less capital per worker will grow faster.
c. the country that started with more capital per worker will grow faster.
d. both countries will grow and at the same higher rate.
ANSWER: b
51. Suppose that there are diminishing returns to capital. Suppose also that two countries are the
same except one has less capital and so less real GDP per person. Suppose that both increase
their saving rate from 3 percent to 4 percent. In the long run
a. both countries will have permanently higher growth rates of real GDP per person, and the
growth rate will be higher in the country with more capital.
b. both countries will have permanently higher growth rates of real GDP per person, and the
growth rate will be higher in the country with less capital.
c. both countries will have higher levels of real GDP per person, and the temporary increase in
growth in the level of real GDP per person will have been greater in the country with more
capital.
d. both countries will have higher levels of real GDP per person, and the temporary increase in
growth in the level of real GDP per person will have been greater in the country with less
capital.
ANSWER: d
52. Other things equal, relatively poor countries tend to grow

a. slower than relatively rich countries; this is called the poverty trap.
b. slower than relatively rich countries; this is called the fall-behind effect.
c. faster than relatively rich countries; this is called the catch-up effect.
d. faster than relatively rich countries; this is called the constant-returns-to-scale effect.
ANSWER: c
53. Two countries are the same, except one is poorer. Assuming the traditional assumption about the
production function is made there are
a. diminishing returns to capital so the poor country grows slower.
b. increasing returns to capital so the poor country grows slower.
c. diminishing returns to capital so the poor country grows faster.
d. increasing returns to capital so the poor country grows faster.
ANSWER: c
54. An increase in the saving rate would, other things the same,
a. increase growth more for a poor country than for a rich country, and raise growth
permanently.
b. increase growth more for a poor country than for a rich country, but raise growth temporarily.
c. increase growth more for a rich country than for a poor country, and raise growth
permanently.
d. increase growth more for a rich country than for a poor country, but raise growth temporarily.
ANSWER: b
55. Real GDP per person is $10,000 in Country A, $20,000 in Country B, and $30,000 in Country C.
The saving rate increases by the same rate in all three countries. Other things equal, we would
expect that
a. all three countries will grow at the same rate.
b. Country A will grow the fastest.
c. Country B will grow the fastest.
d. Country C will grow the fastest.
ANSWER: b
NOTES: r
56. Assuming diminishing returns,

a. the increase in output growth from an increase in the saving rate rises over time, and that, other
things the same, rich countries should grow faster than poor ones.
b. the increase in output growth from an increase in the saving rate falls over time, and that, other
things the same, rich countries should grow faster than poor ones.
c. the increase in output growth from an increase in the saving rate rises over time, and that, other
things the same, poor countries should grow faster than rich ones.
d. the increase in output growth from an increase in the saving rate falls over time, and that, other
things the same, poor countries should grow faster than rich ones.
ANSWER: d
57. The catch-up effect refers to the idea that

a. saving will always catch-up with investment spending.
b. it is easier for a country to grow fast and so catch-up if it starts out relatively poor.
c. population eventually catches-up with increased output.
d. if investment spending is low, increased saving will help investment to "catch-up."
ANSWER: b
58. The traditional view of the production process is that capital is subject to
a. diminishing returns, so that other things the same, real GDP in poor countries should grow at a
faster rate than in rich countries.
b. diminishing returns, so that other things the same, real GDP in poor countries should grow at a
slower rate than in rich countries.
c. increasing returns, so that other things the same, real GDP in poor countries should grow at a
faster rate than in rich countries.
d. increasing returns, so that other things the same, real GDP in poor countries should grow at a
slower rate than in rich countries.
ANSWER: a
59. The logic behind the catch-up effect is that

a. workers in countries with low incomes will work more hours than workers in countries with
high incomes.
b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of
capital.
c. new capital adds more to production in a country that doesn't have much capital than in a
country that already has much capital.
ANSWER: c
60. Country A has real GDP per person of 100,000 while country B has real GDP per person of
200,000. All else constant, country A will eventually have a higher standard of living than country
B if
a. the level of saving per person is 10,000 in country A and 10,000 in country B.
b. the level of saving per person is 12,000 in country A and 15,000 in country B.
ANSWER: c
NOTES: r
61. Country A has real GDP per person of 250,000 while Country B has real GDP per person of
500,000. All else constant, Country A will eventually have a higher standard of living than Country
B if
a. the level of saving per person is 5.000 in Country A and 7,500 in Country B.
b. the level of saving per person is 3,000 in Country A and 6,000 in Country B.
ANSWER: a
NOTES: n
62. Which of the following countries benefited significantly from the catch-up effect in the last half of
the twentieth century?
a. Ethiopia
b. the United States
c. Canada
d. South Korea
ANSWER: d
63. Which of the following is consistent with the catch-up effect?

a. The United States had a higher growth rate before 1900 than after.
b. After World War II the United States had lower growth rates than war-ravaged European
countries.
c. Although the United States has a relatively high level of output per person, its growth rate is
rather modest compared to some countries.
ANSWER: d
64. Over the period 1960-1990,

a. South Korea had a higher growth rate than the United States because it had a higher ratio of
investment to GDP.
b. the United States had a higher growth rate than South Korea because it had a higher ratio of
investment to GDP.
c. South Korea had a higher growth rate than the United States even though it had a similar ratio
of investment to GDP.
d. the United States had a higher growth rate than South Korea even though it had a similar ratio
of investment to real GDP.
ANSWER: c
65. Fretonia and Libstien are the same except Fretonia has a larger capital stock. Both countries
undertake policies that raise their saving rates to the same higher level. We would expect that
a. both countries would have permanent increases in their growth rates, but the increase would
initially be larger in Fretonia.
b. both countries would have permanent increases in their growth rates, but the increase would
initially be smaller in Fretonia.
c. both countries would have temporary increases in their growth rates, but the increase would be
larger in Fretonia.
d. both countries would have temporary increases in their growth rates, but the increase would be
smaller in Fretonia.
ANSWER: d
66. Fretonia and Libstien are the same except Fretonia has a larger capital stock. Both countries
undertake policies that raise their saving rates to the same higher level. We would expect that
a. both countries would have permanent increases in their growth rates, but the increase would
initially be larger in Fretonia.
b. both countries would have permanent increases in their growth rates, but the increase would
initially be smaller in Fretonia.
c. both countries would have temporary increases in their growth rates, but the increase would be
larger in Fretonia.
d. both countries would have temporary increases in their growth rates, but the increase would be
smaller in Fretonia.
ANSWER: d
67. If an American-based firm opens and operates a new clothing factory in Honduras, then it is
engaging in
a. foreign portfolio investment.
b. foreign financial investment.
c. foreign direct investment.
d. indirect foreign investment.
ANSWER: c
TOPICS: DISC: International Trade Foreign Direct Investment
NOTES: r
68. If an American-based firm opens and operates a factory in China, then it is engaging in
b. foreign financial investment.
d. indirect foreign investment.
ANSWER: c
TOPICS: DISC: International Trade foreign Direct Investment
69. In the 1800s, Europeans purchased stock in American companies that used the funds to build
railroads and factories. The Europeans who did this engaged in
b. indirect domestic investment.
d. foreign indirect investment.
ANSWER: a
70. In recent decades Americans have increased their purchase of stocks of foreign-based
companies. The Americans who have bought these stocks were engaged in
b. indirect domestic investment.
d. foreign indirect investment.
ANSWER: a
71. Suppose that an American opens and operates a candy factory in Finland. This is an example of
a. foreign direct investment. American saving is used to finance Finish investment.
b. foreign direct investment. American saving is used to finance American investment.
c. foreign portfolio investment. American saving is used to finance Finish investment.
d. foreign portfolio investment. American saving is used to finance American investment.
ANSWER: a
TOPICS: DISC: Internetional Trade Foreign Direct Investment
72. Suppose that an American company opens and operates a restaurant in Ireland. This is an
example of
a. foreign direct investment. American saving is used to finance Irish investment.
b. foreign direct investment. American saving is used to finance American investment.
c. foreign portfolio investment. American saving is used to finance Irish investment.
d. foreign portfolio investment. American saving is used to finance American investment.
ANSWER: a
73. Foreign saving is used for domestic investment when foreigners engage in
a. foreign direct investment.
b. foreign portfolio investment.
c. either foreign direct investment or foreign portfolio investment.
ANSWER: c
74. If WarmWear, a U.S.manufacturer of winter clothing, opens a new factory in Austria, then
a. Austrian GNP increases by more than Austrian GDP, because GDP includes income earned
by foreigners working in Austria.
b. Austrian GNP increases by more than Austrian GDP, because GDP excludes income earned
by foreigners working in Austria.
c. Austrian GNP increases by less than Austrian GDP, because GDP includes income earned by
foreigners working in Austria.
d. Austrian GNP increases by less than Austrian GDP, because GDP excludes income earned by
foreigners working in Austria.
ANSWER: c
75. Suppose a U.S. automaker builds and operates a new factory in Italy. Future production from
such an investment will
a. increase Italian GDP more than it increases Italian GNP.
b. increase Italian GNP more than it increases Italian GDP.
c. have no affect on Italian GNP, but will increase Italian GDP.
d. have no affect on either Italian GDP or GNP.
ANSWER: a
NOTES: r
76. Suppose Japanese-based Toshiba Corporation builds and operates a new computer factory in the
United States.
Future production from such an investment will
a. increase U.S. GNP more than it increases U.S. GDP.
b. increase U.S. GDP more than it increases U.S. GNP.
c. have no affect on U.S. GNP, but will increase U.S. GDP.
d. have no affect on U.S. GNP or GDP.
ANSWER: b
77. The opening of a new American-owned factory in Algeria would tend to increase Algeria's GDP
more than it increases Algeria's GNP because
a. some of the income from the factory accrues to people who do not live in Algeria.
b. gross domestic product is income earned within a country by both residents and nonresidents,
whereas gross national product is the income earned by residents of a country while producing
both at home and abroad.
c. all of the income from the factory is included in Algeria's GDP.
ANSWER: d
78. If a Japanese company opens a new factory in South Korea, it makes

a. foreign direct investment. The factory will make a bigger impact on South Korea’s GDP than
on its GNP.
b. foreign direct investment. The factory will make a bigger impact on South Korea’s GNP than
on its GDP.
c. foreign portfolio investment. The factory will make a bigger impact on South Korea’s GDP
than on its GNP.
d. foreign portfolio investment. The factory will make a bigger impact on South Korea’s GNP
than on its GDP.
ANSWER: a
NOTES: r
79. When Chile experiences investment from abroad, it experiences, as a result,

a. an increase in productivity.
b. a decrease in Gross National Product (GNP).
c. lower wages for Chilean workers.
ANSWER: a
TOPICS: DISC : Consumption, Saving, and Investment Investment
80. If companies from foreign countries build and operate factories in China, then China’s productivity
a. and the wages of Chinese workers increase.
b. increases but the wages of Chinese workers decrease.
c. decreases but the wages of Chinese workers increase.
d. and the wages of Chinese workers decrease.
ANSWER: a
TOPICS: DISC: International Trade foreign Direct Investment
81. Investment from abroad

a. is a way for poor countries to learn the state-of-the-art technologies developed and used in
richer countries.
b. is viewed by economists as a way to increase growth.
c. often requires removing restrictions that governments have imposed on foreign ownership of
domestic capital.
ANSWER: d
82. An organization that tries to encourage the flow of investment to poor countries is the
a. World Bank.
b. Organization of Less Developed Countries.
c. Alliance of Developing Countries.
d. International Development Alliance.
ANSWER: a
83. A country’s human capital increases

a. if its workers become better educated or healthier.
b. only if its workers become better educated.
c. only if its workers become healthier.
ANSWER: a
TOPICS: DISC: Wage Dispersion Human Capital
84. Investment in
a. physical capital, unlike investment in human capital, has an opportunity cost.
b. physical capital, like investment in human capital, has an opportunity cost.
c. human capital is particularly attractive because it involves no externalities.
d. human capital has been shown to be relatively unimportant, relative to investment in physical
capital, for a country’s long-run economic success.
ANSWER: b
TOPICS: DISC: Thinking Like an Economist Opportunity Cost
85. Which of the following is generally an opportunity cost of investment in human capital?
a. future job security
b. forgone present wages
c. increased earning potential
ANSWER: b
86. In the U.S., each additional year of schooling has historically raised a person's wage on average
by about
a. 2 percent.
b. 5 percent.
c. 10 percent.
d. 15 percent.
ANSWER: c
87. Educational attainment tends to be

a. low in countries with high population growth.
b. low in countries with low population growth.
c. high in countries with high population growth.
d. None of the above are true.
ANSWER: a
TOPICS: DISC:General
88. In the U.S., each additional year of schooling has historically raised a person's wage on average
by about
a. 5 percent. In less developed countries the gap between the wages of educated and uneducated
workers is smaller.
b. 10 percent. In less developed countries the gap between the wages of educated and
uneducated workers is smaller.
c. 5 percent. In less developed countries the gap between the wages of educated and uneducated
workers is larger.
d. 10 percent. In less developed countries the gap between the wages of educated and
uneducated workers is larger.
ANSWER: d
89. The return to schooling for society is higher than the return to schooling for the individual if
a. the concept of diminishing returns applies to education.
b. the concept of constant returns to scale applies to education.
c. human capital conveys positive externalities.
d. investment in human capital involves no opportunity costs.
ANSWER: c
TOPICS: DISC: Public Economics Positive Externalities
90. Educated people may generate ideas that increase production. These ideas
a. produce a return to society from education that is greater than the return to the individual.
b. could justify government subsides for education.
c. are external benefits of education.
ANSWER: d
91. Which of the following is an example of the "brain drain?"

a. A country's most highly educated workers emigrate to rich countries.
b. A country has such a poor educational system that human capital falls over time.
c. The population of a country grows so fast that the educational system can't keep up.
d. A country steals patented technology from another country.
ANSWER: a
92. Suppose a person receives an education in her home country. Which of the following will tend to
make the increase
in GDP of the person’s home country larger than the increase in this person’s income?
a. externalities and brain drain
b. externalities but not brain drain
c. brain drain but not externalities
d. neither externalities nor brain drain
ANSWER: b
TOPICS: DISC: Public Economics Externalities
93. Economist Robert Fogel focused on which of the following factors as one determinant of long-run
economic growth?
a. education
b. research and development
c. nutrition
d. trade restrictions
ANSWER: c
94. According to research by Robert Fogel, what proportion of the British population in 1780 was so
malnourished that they could not perform manual labor?
a. 5 percent
b. 10 percent
c. 20 percent
d. 25 percent
ANSWER: c
NOTES: r
95. According to research by Robert Fogel, people in Britain grew taller because of
a. genetics. However this increase in height had no effect on productivity.
b. genetics. This increase in height is associated with higher productivity.
c. higher caloric intake. However, this increase in height had no effect on productivity.
d. higher caloric intake. This increase in height is associated with higher productivity.
ANSWER: d
TOPICS: DISC: thinking Like an Economist
NOTES: r
96. According to research by Robert Fogel, what proportion of the increase in the standard of living in
Britain between 1790 and 1980 can be accounted for by greater caloric intake?
a. 10 percent
b. 20 percent
c. 30 percent
d. 40 percent
ANSWER: c
NOTES: r
97. Which of the following terms is used to refer to the ability of people to exercise authority over the
resources they own?
a. natural rights
b. property rights
c. input control
d. collective control
ANSWER: b
TOPICS: DISC: General

a. In an economy-wide sense, property rights are an important prerequisite for the price system to
work.
b. Property rights give people the ability to exercise authority over the resources they own.
c. Based on the available evidence, the existence of well-established and well-enforced property
rights appears to be associated with an enhanced standard of living.
ANSWER: d
99. In some countries it is time consuming and costly to establish ownership of property. Reforms to
reduce these costs would likely
a. have no affect on either real GDP nor productivity
b. raise real GDP and productivity.
c. raise real GDP but not productivity.
d. raise productivity but not real GDP.
ANSWER: b
100. Government corruption

a. impedes the coordinating power of markets and discourages investment.
b. impedes the coordinating power of markets but does not discourage investment.
c. does not impede the coordinating power of markets, but does discourage investment.
d. can neither impede the coordinating power of markets nor discourage investment.
ANSWER: a
NOTES: n
101. The dictator of Turan has recently begun to arbitrarily seize farms belonging to his political
opponents, and he has given the farms to his friends. His friends don't know much about farming.
The courts in Turan have ruled that the seizures are illegal, but the dictator has ignored the
rulings. Other things equal, we would expect that the growth rate in Turan will
a. fall temporarily, but will return to where it was when the new owners learn how to farm.
b. increase because the total amount of human capital in the country will increase as the new
owners learn how to farm.
c. fall and remain lower for a long time.
d. not be affected unless widespread civil disorder or civil war results.
ANSWER: c
102. The dictator of a country requires that companies planning to open or expand must pay a large
fee to file an application one year prior to building new factories or expanding existing ones.
Other things the same, in the long run this requirement would
a. reduce real GDP per person and productivity.
b. reduce real GDP per person but not productivity.
c. reduce productivity but not real GDP per person.
ANSWER: a
103. Suppose that a new government is elected in Eurnesia. The new government takes steps toward
improving the court system and reducing government corruption. The citizens of Eurnesia find
these efforts credible and outsiders believe these changes will be effective and long lasting.
These changes will probably
a. raise real GDP per person and productivity in Eurnesia.
b. raise real GDP per person but not productivity in Eurnesia.
c. raise productivity but not real GDP per person in Eurnesia.
d. raise neither productivity nor real GDP per person in Eurnesia.
ANSWER: a
104. If a newly elected government takes actions that makes its country’s courts more efficient and
less corrupt, then
a. producers will have greater confidence that they will benefit from their efforts.
b. producers are likely to be more specialized.
c. buyers and sellers will be more likely to honor contracts.
ANSWER: d
NOTES: n
105. Inward-oriented policies

a. include imposing tariffs and other trade restrictions.
b. have generally increased productivity and growth in the countries that pursued them.
c. promote the production of goods and services that the country produces most efficiently.
ANSWER: a
TOPICS: DISC: International trade International Trade Restrictions
106. Inward-oriented policies

a. are generally supported by economists.
b. are primarily concerned with the development of human capital.
c. in some ways are like prohibiting the use of certain technologies.
ANSWER: c
TOPICS: DISC: International Trade International Trade Restrictions
107. Which of the following will increase a country’s real GDP per person?
a. imposing restrictions on foreign trade and foreign investment
b. imposing restrictions on foreign trade and reducing restrictions on foreign investment
c. reducing restrictions on foreign trade and imposing restrictions on foreign investment
d. reducing restrictions on foreign trade and foreign investment
ANSWER: d
108. An increase in capital will increase real GDP per person

a. more in a poor country than a rich country. The increase in real GDP per person will be larger
if the addition to capital is from domestic rather than foreign investment.
b. more in a poor country than a rich country. The increase in real GDP per person will be the
same whether the addition to capital is from domestic or foreign investment.
c. less in a poor country than a rich country. The increase in real GDP per person will be larger
d. less in a poor country than a rich country. The increase in real GDP per person will be the
same whether the addition to capital is from domestic or foreign investment.
ANSWER: b
109. An increase in capital will increase real GNP per person

a. more in a poor country than a rich country. The increase in real GNP per person will be larger
b. more in a poor country than a rich country. The increase in real GNP per person will be larger
if the addition to capital is foreign rather than from domestic investment.
c. less in a poor country than a rich country. The increase in real GNP per person will be larger
d. less in a poor country than a rich country. The increase in real GNP per person will be larger
if the addition to capital is foreign rather than from domestic investment.
ANSWER: a
110. Countries that pursued outward-oriented policies in the 20th century

a. experienced lower rates of economic growth than did countries that pursued inward-oriented
policies.
b. experienced higher levels of political instability than did countries that pursued inward-oriented
policies.
c. include Singapore, South Korea, and Taiwan.
ANSWER: c
111. Countries with more than 80 percent of their population living within 100 kilometers of a coast
will have an average GDP per person that is
a. around four times a country with less than 20 percent of the population living near the coast.
b. around ten times a country with less than 20 percent of the population living near the coast.
c. around twenty times a country with less than 20 percent of the population living near the
coast.
d. around fifty times a country with less than 20 percent of the population living near the coast.
ANSWER: a
112. The president of Suldinia, a developing country, proposes that his country needs to help domestic
firms by reducing trade restrictions.
a. These are outward-oriented policies and most economists believe they would have beneficial
effects on growth in Suldinia.
b. These are outward-oriented policies and most economists believe they would have adverse
c. These are inward-oriented policies and most economists believe they would have beneficial
d. These are inward-oriented policies and most economists believe they would have adverse
ANSWER: a
TOPICS: DISC: International Trade Free Trade
113. In the past there have been violent protests against the World Bank and the World Trade
Organization. The protesters argued that these institutions promote free trade and also encourage
corporations in rich countries to invest in poor countries. The protesters contended that these
practices make rich countries richer and poor countries poorer. An economist would
a. disagree with the protesters because these practices will help make both rich and poor
countries richer.
b. disagree with the protesters about free trade, but would agree with the protesters about
corporate investment.
c. disagree with the protesters about corporate investment, but would agree with the protesters
about free trade.
d. agree with the protesters.
ANSWER: a
TOPICS: DISC: International trade Free Trade
114. Outward-oriented policies

a. allow countries to take advantage of gains from trade.
b. have generally led to high growth for the countries that pursued them.
c. receive widespread support from economists.
ANSWER: d
115. When a country removes trade barriers and imports appliances and exports engineering services,
a. its growth slows.
b. its productivity decreases.
c. it is essentially transforming engineering services into appliances.
d. its economic well-being decreases while that of the country that sells appliances increases.
ANSWER: c
TOPICS: DISC: International Trade
116. Suppose a country increases trade restrictions. This country would be pursing an
a. inward policy, which most economists believe has beneficial effects on the economy.
b. inward policy, which most economists believe has adverse effects on the economy.
c. outward policy, which most economists believe has beneficial effects on the economy.
d. outward policy, which most economists believe has adverse effects on the economy.
ANSWER: b
117. A country with a relatively low level of real GDP per person is considering adopting two policies
to promote economic growth. The first is to decrease barriers to trade. The second is to restrict
foreign portfolio investment. Which of these policies do most economists say promote growth?
a. both the first and the second
b. the first but not the second
c. the second but not the first
d. neither the first nor the second
ANSWER: b
NOTES: r
118. National defense and knowledge are generally considered to be

a. private goods.
b. public goods.
c. proprietary goods.
d. societal goods.
ANSWER: b
TOPICS: DISC: Public Economics Public Goods
119. Patents turn new ideas into

a. public goods, and increase the incentive to engage in research.
b. public goods, but decrease the incentive to engage in research.
c. private goods, and increase the incentive to engage in research.
d. private goods, but decrease the incentive to engage in research.
ANSWER: c
120. Inventors often obtain patents on new products and processes, thereby turning new ideas into
a. private goods and increasing the incentive to engage in research.
b. private goods but decreasing the incentive to engage in research.
c. public goods and increasing the incentive to engage in research.
d. public goods but decreasing the incentive to engage in research.
ANSWER: a
121. Electronics firms may be able to get patents on their ideas. Doing so makes their ideas
a. private goods rather than public goods. This gives people more incentive to engage in
research.
b. private goods rather than public goods. This gives people less incentive to engage in research.
c. public goods rather than private goods. This gives people more incentive to engage in
research.
d. public goods rather than private goods. This gives people more incentive to engage in private
research.
ANSWER: a
122. Once an idea enters society's pool of knowledge, the idea becomes a
a. societal good.
b. private good.
c. public good.
d. proprietary good.
ANSWER: c
123. In medieval Europe an important technological advance was the use of the padded horse collar
for plowing. Once this idea was thought of, other people used it. This illustrates that knowledge
is generally a
a. public good.
b. societal good.
c. private good.
d. normal good.
ANSWER: a
124. In the 19th century John Deere took out a patent on a newly designed plow that incorporated
steel to make plowing faster. Many farmers bought plows from his company and he made
millions. This example shows that patents turn an idea into a
a. public good.
b. societal good.
c. private good.
d. normal good.
ANSWER: c
NOTES: n
125. A rapid increase in the number of workers, other things the same, is likely in the short term to
a. raise real GDP per person, but decrease real GDP.
b. decrease both real GDP and real GDP per person.
c. raise both real GDP and real GDP per person.
d. raise real GDP, but decrease real GDP per person.
ANSWER: d
TOPICS: DISC: Growth Theory Population Growth
126. If the best educated and most skilled persons leave a country, then in the short term this
country’s human capital per worker
a. and physical capital per worker will increase.
b. and physical capital per worker will decrease.
c. will increase but physical capital per worker will decrease.
d. will decrease but physical capital per worker will increase.
ANSWER: d
127. Because of its effect on the amount of capital per worker, in the short term an increase in the
working population is likely to
a. raise productivity. Other things the same, this increase will be larger in a poor country.
b. raise productivity. Other things the same, this increase will be larger in a rich country.
c. reduce productivity. Other things the same, this decrease will be larger in a poor country.
d. reduce productivity. Other things the same, this decrease will be larger in a rich country.
ANSWER: c
128. Other things the same, an increase in population growth

a. increases capital per worker. Further, there is some evidence that a higher population growth
rate may increase the pace of technological progress.
b. increases capital per worker. However, there is some evidence that a higher population
growth rate may decrease the pace of technological progress.
c. decreases capital per worker. Further, there is some evidence that a higher population growth
rate may decrease the pace of technological progress.
d. decreases capital per worker. However, there is some evidence that a higher population
growth rate may increase the pace of technological progress.
ANSWER: d
129. If over a short time there is an increase in the number of people retired and a decrease in the
number of people working, then productivity
a. and real GDP per person rise.
b. rises but real GDP per person falls.
c. falls and real GDP per person rises.
d. and real GDP per person fall.
ANSWER: b
130. If over a short time a large number of teenagers become old enough to find employment and a
much smaller number of people retire, then productivity
a. and real GDP per person rise.
b. rises but real GDP per person falls.
c. falls but real GDP per person rises.
d. and real GDP per person fall.
ANSWER: c
NOTES: n
131. In the fourteenth century it is estimated that deaths resulting from the bubonic plague reduced the
population by about a third. Assuming diminishing returns, the decrease in population should have
a. increased productivity and real GDP per person.
b. increased productivity but decreased real GDP per person.
c. increased real GDP per person, but decreased productivity.
d. decreased productivity and real GDP per person.
ANSWER: a

a. China allows only one child per family and couples that violate this rule are subject to
substantial fines.
b. In developed countries, population growth is consistently about 3 percent per year; in
developing countries it is consistently about 5 percent per year.
c. Educational attainment tends to be lowest in countries with the highest population growth.
d. Economists generally believe that a country that decreases a high population growth rate can
increase its economic growth rate.
ANSWER: b
133. Which of the following countries achieved higher economic growth, in part by mandating a
reduction in population growth?
a. Great Britain
b. China
c. Australia
d. France
ANSWER: b
134. Malthus predicted that the power of population

a. was greater than the power of the earth to produce subsistence. His forecast was on the
mark.
b. was greater than the power of the earth to produce subsistence. His forecast was off the
mark.
c. was less than the power of the earth to produce subsistence. His forecast was on the mark.
d. was less than the power of the earth to produce subsistence. His forecast was off the mark.
ANSWER: b
135. Rapid population growth

a. was hailed by Thomas Robert Malthus as the key to future economic growth.
b. tends to lead to higher levels of educational attainment.
c. is the main reason that less developed nations are poor.
d. may depress economic prosperity by reducing the amount of capital which each worker has to
work with.
ANSWER: d
136. Thomas Malthus’s predictions turned out to be wrong due to

a. technological advances such as those during the Industrial Revolution.
b. smaller populations now than in the time of Malthus.
c. the effects of brain-drain.
d. unlimited natural resources.
ANSWER: a
137. Which of the following is an observation made by economist Michael Kremer?

a. World growth rates increased as the population increased.
b. Technological progress allows for increasing population because of advances in agriculture.
c. World population is growing so rapidly that soon it will outstrip natural resources and our
standard of living will decline.
d. All of the above are observations made by Kremer.
ANSWER: a
TOPICS: DISC: Growth Rate Population Growth

a. If developing countries limit career and educational opportunities for women, birth rates are
likely to be lower.
b. Growth rates in developed and developing countries are nearly the same.
c. Historically, in periods where the rate of population growth was high, so was the rate of
growth in world real GDP per person.
ANSWER: c
139. Which of the following is true?

a. Kremer argued that with greater population, society would generate more ideas so that
growth of real GDP per person could continue. Malthus argued that increasing population
would outstrip agricultural production.
b. Kremer argued that increases in population would reduce the amount of human and physical
capital per worker so that eventually the standard of living would decline. Malthus argued that
increases in technology would allow increased output growth so that even with population
growth, society would enjoy a higher standard of living.
c. Malthus argued that with greater population, society would generate more ideas so that growth
of real GDP per person could continue. Kremer argued that increasing population would
outstrip agricultural production.
d. Malthus argued that increases in population would reduce the amount of human and physical
capital per worker so that eventually the standard of living would decline. Kremer argued that
increases in technology would allow increased output growth so that even with population
growth, society would enjoy a higher standard of living.
ANSWER: a
140. An increase in a country’s population may contribute to the rate of technological progress
because a larger population
a. forces the capital stock to be spread more thinly.
b. forces natural resources to be spread more thinly.
c. brings with it more scientists, inventors, and engineers.
d. brings with it more favorable recognition from other countries.
ANSWER: c
141. Over extended periods of time, population growth

a. has no effect on the standard of living.
b. has uncertain effects on the standard of living.
c. clearly raises the standard of living.
d. clearly lowers the standard of living.
ANSWER: b
142. Other things the same, higher population growth

a. raises the amount of physical capital per worker and there is some evidence that it raises the
pace of technological progress.
b. raises the amount of physical capital per worker, but there is some evidence that it reduces
the pace of technological progress.
c. reduces the amount of physical capital per worker, but there is some evidence that it raises
d. reduces the amount of physical capital per worker and there is some evidence that it reduces
ANSWER: c
143. On the basis of theory and empirical evidence, economists have reached several conclusions
about economic growth. Which of the following is not one of these conclusions?
a. A relatively simple way to increase growth rates permanently is to increase a country's saving
rate.
b. Growth is generally inhibited rather than promoted by policies like protective tariffs.
c. Well-established property rights that are enforced by fair and efficient courts are important to
economic growth.
d. Countries with few domestic natural resources still have opportunities for economic growth.
ANSWER: a
144. Which of the following provide benefits to society at large and not just to the person(s) who
pursues it?
a. both technological knowledge that is a public good and education
b. technological knowledge that is a public good, but not education
c. education, but not technological knowledge that is a public good
d. neither education, nor technological knowledge that is a public good
ANSWER: a
145. All else equal, which of the following would tend to cause real GDP per person to rise?
a. a change from outward-oriented policies to inward-oriented policies
b. an increase in investment in human capital
c. a weakening of property rights
ANSWER: b
146. All else equal, which of the following would tend to cause real GDP per person to rise?
a. a change from inward-oriented policies to outward-oriented policies
b. an increase in investment in human capital
c. strengthening of property rights.
ANSWER: d
147. Which of the following statements is not correct?

a. The catch-up effect is based on the assumption of diminishing returns to capital.
b. Investment in poor countries by citizens of rich countries is one way poor countries can learn
new technologies.
c. Malthus argued that charity and government aid was an effective way to reduce poverty.
d. Peace and justice are keys to growth.
ANSWER: c
148. Senator Smith says that in order to help poor countries develop, the United States should: 1.
Prevent U.S. corporations from investing in poor countries because they take profits that the poor
countries should have; 2. Not import goods from poor countries that use child labor; 3. Work to
promote political stability in poor countries; and 4. Reduce poor countries’ reliance on market
forces in their economies. How many of these ideas are likely to help poor countries grow?
a. 1
b. 2
c. 3
d. 4
ANSWER: a
NOTES: r
149. Senator Noitall says that in order to help poor countries develop, the United States should: 1.
Encourage poor countries to allow U.S. and other foreign firms to build and operate businesses
in their country; 2. Reduce or eliminate subsidizes to U.S. producers when poor countries have a
comparative advantage producing those goods the U.S. subsidizes; 3. Work to promote political
stability in poor countries; and 4. Reduce poor countries reliance on market forces in their
economies. How many of these ideas are likely to help poor countries grow?
a. 1
b. 2
c. 3
d. 4
ANSWER: c
NOTES: r
150. The president of a poor country has announced that he will implement the following measures
which he claims are designed to increase growth: 1. Reduce corruption in the legal system; 2.
Reduce reliance on market forces because they allocate goods and services in an unfair manner;
3. Restrict investment in domestic industries by foreigners because they take some of the profits
out of the country; 4. Encourage trade with neighboring countries; and 5. Increase the fraction of
GDP devoted to consumption. How many of these measures will have a positive effect on
growth?
a. 1
b. 2
c. 3
d. 4
ANSWER: b
151. The Economic Development Minister of a country has a list of things she thinks may explain her
country's low growth of real GDP per person relative to other countries. She asks you to pick the
one you think most likely explains her country's low growth. Which of the following contributes
to low growth?
a. poorly enforced property rights
b. outward-oriented trade policies
c. policies that permit foreign investment
ANSWER: a
TOPICS: DISC : Thinking Like an Economist
152. Some poor countries appear to be falling behind rather than catching up with rich countries.
Which of the following could explain the failure of a poor county to catch up?
a. The poor country has outward-oriented trade policies.
b. The poor country allows foreign direct investment.
c. The poor country has poorly developed property rights.
ANSWER: c

a. There is no debate about the effects of higher population growth on economic growth.
b. Natural resources clearly place limits on growth; there is simply no way to reduce either the
amount or type of natural resources needed to produce goods.
c. How much an increase in capital increases a country’s output is independent of that country’s
current level
of capital.
d. Economists argue that outward rather than inward policies are likely to promote economic
growth.
ANSWER: d
154. Which of the following public policies would be least likely to result in more rapid economic
growth for a poor or developing country?
a. policies designed to promote economic development in coastal areas
b. policies designed to foster strict enforcement of property rights
c. policies designed to foster free trade
d. inward-oriented policies
ANSWER: d
155. Other things equal, the likelihood that a country will experience a relatively-high level of income
is greater if the country
a. pursues inward-oriented policies.
b. has natural seaports.
c. minimizes the role of the courts in its economy.
d. enacts policies to encourage consumption and discourage saving.
ANSWER: b
Multiple Choice – Section 04: The Importance of Long-Run Growth
1. Economists differ in their views of the role of the government in promoting economic growth. At
the very least, the government should
a. lend support to the invisible hand by maintaining property rights and political stability.
b. limit foreign investment to industries that don't already exist in the country.
c. impose trade restrictions to protect the interests of domestic producers and consumers.
d. subsidize key industries.
ANSWER: a
POINTS: 1
2. Economists differ in their views of the role of the government in promoting economic growth. A
controversial idea is that government should
a. lend support to the invisible hand by maintaining property rights and political stability.
b. lower barriers and impediments to free trade.
c. encourage capital formation.
d. target and subsidize specific industries important for technological progress.
ANSWER: d
POINTS: 1
True/False and Short Answer
1. Real GDP per person in rich countries, such as Germany, is sometimes more than 10 times that of
poor countries like India.
a. True
b. False
ANSWER: True
2. If per capita real income grows by 2 percent per year, then it will double in approximately 20
years.
a. True
b. False
ANSWER: False
3. Both the standard of living and the growth of real GDP per person vary widely across countries.
a. True
b. False
ANSWER: True
4. According to some estimates, over the last two decades China has had an annual average growth
rate of about 12 percent.
a. True
b. False
ANSWER: True
5. In some countries in Sub-Saharan Africa real GDP per person has been stagnant for many years.
a. True
b. False
ANSWER: True
6. International data on real GDP per person gives us a sense of how standards of living vary across
countries.
a. True
b. False
ANSWER: True
7. In 2010, income per person in the United States was about 14 times that in India.
a. True
b. False
ANSWER: True
NOTES: r
8. In the United States in 2010 real GDP per person was about $47,000, while in some poor countries
real GDP per person was less than $5,000.
a. True
b. False
ANSWER: True
NOTES: r
9. Over the period 1870-2010, the United States experienced an average annual growth rate of real
GDP per person of about 4 percent per year.
a. True
b. False
ANSWER: False
10. Although growth rates across countries vary some, rankings of countries by income remain pretty
much the same over time.
a. True
b. False
ANSWER: False
11. Over the last 140 years or so, on average Canada’s real GDP per-person grew faster than that of
the U.K.
a. True
b. False
ANSWER: True
12. Since 1870 Canadian and U.S real GDP per person grew from below to above that in the United
Kingdom. The explanation for this is likely that productivity grew faster in Canada and the U.S.
than in the United Kingdom.
a. True
b. False
ANSWER: True
13. Over the period 1890-2010, Japan experienced a 2.65 percent average annual growth rate of real
GDP per person.
a. True
b. False
ANSWER: True
14. Over the period 1900-2010, Brazil’s rate of economic growth exceeded that of China.
a. True
b. False
ANSWER: True
15. If it could increase its growth rates slightly, a country with low income would catch up with rich
countries in about ten years.
a. True
b. False
ANSWER: False
16. If a country has a higher level of productivity than another, then it also has a higher level of real
GDP.
a. True
b. False
ANSWER: False
17. International data on the history of real GDP growth rates shows that over the last 120 years or
so, rich countries got richer and poor countries got poorer.
a. True
b. False
ANSWER: False
18. Productivity can be computed as the number of hours worked divided by output.
a. True
b. False
ANSWER: False
19. Journey Motorcycles produced 100 motorcycles using 50 workers who each worked 8 hours a
day. Journey’s productivity was 1/4.
a. True
b. False
ANSWER: True
NOTES: r
20. If Country A produces 7,000 units of goods and services using 700 hours of labor, and if Country
B produces 5,500 units of goods and services using 500 units of labor, then productivity is lower in
Country A than in Country B.
a. True
b. False
ANSWER: True
21. Indonesians, for example, have a lower standard of living than Americans because they have a
lower level of productivity.
a. True
b. False
ANSWER: True
22. Like physical capital, human capital is a produced factor of production.

a. True
b. False
ANSWER: True
23. Human capital is the term economists use to refer to the knowledge and skills that workers
acquire through education, training, and experience.
a. True
b. False
ANSWER: True
24. Increases in both human capital per worker and physical capital per worker increase productivity.
a. True
b. False
ANSWER: True
25. A forest is an example of a nonrenewable resource.

a. True
b. False
ANSWER: False
26. Petroleum is an example of a nonrenewable resource.

a. True
b. False
ANSWER: True
27. Historical trends in the prices of most natural resources compared to prices of other goods indicate
that most natural resources have become scarcer over time.
a. True
b. False
ANSWER: False
28. It is possible for a country without a lot of domestic natural resources to have a high standard of
living.
a. True
b. False
ANSWER: True
29. Constant returns to scale is the point on a production function where increasing inputs will no
longer increase output.
a. True
b. False
ANSWER: False
30. If a production function has constant returns to scale, then if all inputs double so does production.
a. True
b. False
ANSWER: True
31. As capital per worker rises, output per worker rises. However, this increase in output per worker
is smaller at smaller levels of existing capital per worker.
a. True
b. False
ANSWER: False
TOPICS: DISC: Producer Theory Marginal Product
NOTES: r
32. The same size decrease in the amount of capital stock per worker will cause output per worker to
fall by more in a country with a relatively high level of capital per worker than in a country with a
relatively low level of capital per worker.
a. True
b. False
ANSWER: False
33. An increase in the saving rate permanently increases the growth rate of real GDP per person.
a. True
b. False
ANSWER: False
34. An increase in a country’s saving rate permanently raises its productivity.

a. True
b. False
ANSWER: True
35. Other things the same, another unit of capital will increase output by more in a poor country than
in a rich country.
a. True
b. False
ANSWER: True
36. The catch-up effect refers to the idea that poor countries, despite their best efforts, are not likely
ever to experience the economic growth rates of wealthier countries.
a. True
b. False
ANSWER: False
37. Two countries with the same saving rates must have the same growth rate of real GDP per
person.
a. True
b. False
ANSWER: False
38. Assuming constant returns to scale, if two countries are otherwise the same, the one that is
poorer grows faster.
a. True
b. False
ANSWER: True
39. Studies confirm that controlling for other variables such as the percentage of GDP devoted to
investment, poor countries tend to grow at a faster rate than rich countries.
a. True
b. False
ANSWER: True
40. When Americans invest in Russia, the income of Russians (that is, Russian GNP) rises by more
than production in Russia (that is, Russian GDP).
a. True
b. False
ANSWER: False
41. If your company opens and operates a branch in a foreign country, your company engages in
foreign direct investment.
a. True
b. False
ANSWER: True
42. Other things the same, domestic investment will increase a country’s real GDP by more than
foreign investment.
a. True
b. False
ANSWER: False
43. Foreign direct investment and domestic investment have the same effect on all measures of
economic prosperity.
a. True
b. False
ANSWER: False
44. An increase in capital increases productivity only if it is purchased and operated by domestic
residents.
a. True
b. False
ANSWER: False
45. Investment in human capital has opportunity costs, but investment in physical capital does not.
a. True
b. False
ANSWER: False
46. Other things the same, an economy’s factors of production are likely to be used more effectively
if there is an economywide respect for property rights.
a. True
b. False
ANSWER: True
47. A country that made its courts less corrupt and its government more stable would likely see its
standard of living rise.
a. True
b. False
ANSWER: True
48. If a country made it easier for people to establish and prove the ownership of their property, real
GDP per person would likely rise.
a. True
b. False
ANSWER: True
49. Economists generally believe that inward-oriented policies are more likely to foster growth than
outward-oriented policies.
a. True
b. False
ANSWER: False
50. Economists generally believe that policies such as reducing barriers to trade are likely to foster
economic growth.
a. True
b. False
ANSWER: True
51. If a rich country reduced subsidies to domestic producers of goods that poor countries have a
comparative advantage producing, the standard of living in these poor countries would likely rise.
a. True
b. False
ANSWER: True
52. One reason that governments may find it useful to sponsor universities and basic research is that
to a large extent knowledge is generally a private good.
a. True
b. False
ANSWER: False
TOPICS: DISC: Public Economics
53. The population growth rate tends to be higher in developed countries than in developing countries.
a. True
b. False
ANSWER: False
54. In countries where women are discriminated against, policies that increase the likelihood of career
success and educational opportunities for women are likely to decrease the birth rate.
a. True
b. False
ANSWER: True
55. Countries with high population growth rates tend to have lower levels of educational attainment.
a. True
b. False
ANSWER: True
TOPICS: DISC:General
56. Economist Michael Kremer found that world growth rates fell as population increased.
a. True
b. False
ANSWER: False
57. A country’s standard of living depends on its ability to produce goods and services.
a. True
b. False
ANSWER: True
58. Use the data on U.S. real GDP below to compute real GDP per person for each year. Then use
these numbers to compute the percentage increase in real GDP per person from 1993 to 2012.
Year Real GDP (2009 prices) Population

1993 $9,510,800 million 257.8 million
2012 $15,470,700 million 313.85 million
ANSWER: Real GDP per person in 1993 was $9,510,800/257.8 = about

$36,892. Income per person in 2012 was $15,470,700/313.85 = about
$49,293. Income per person grew by (49,293 - 36,892)/36,892 =
about 33.6%.
NOTES: r
59. Why is productivity related to the standard of living? In your answer be sure to explain what
productivity and the standard of living mean. Make a list of things that determine labor
productivity.
ANSWER: The standard of living is a measure of how well people live. Income
per person is an important dimension of the standard of living and is
positively correlated with other things such as nutrition and life
expectancy that make people better off. Productivity measures how
much people can produce in an hour. As productivity increases,
people can produce more (and use less to produce the same
amount) and so their standard of living increases.
The factors that determine labor productivity include the amounts of

physical capital (equipment and structures), human capital
(knowledge and skills), and natural resources available to workers,
as well as the state of technological knowledge in society.
60. What is a production function? Write an equation for a typical production function, and explain
what each of the terms represents.
ANSWER: A production function is a mathematical representation of the

relationship between the quantity of inputs used in production and
the quantity of output produced using these inputs. A typical
production function could be written as Y = A F(L, K, H, N), where
Y denotes the quantity of output, L the quantity of labor, K the
quantity of physical capital, H the quantity of human capital, N the
quantity of natural resources, and A is a variable that reflects the
available production technology.
61. What is the difference between human capital and technology?
ANSWER: Technology is society's understanding of production techniques.

Human capital is the labor force's understanding of these ideas. A
society may have lots of information available about how to produce
goods, but still have lots of people who know little of this
information. For example, in the United States there exists
information about how best to use a butter churn and how to make
lye soap, but most people know nothing about it.
62. The catch-up effect says that countries with low income can grow faster than countries with
higher income.
However, in statistical studies that include many diverse countries we do not observe the catch-
up-effect unless we control for other variables that affect productivity. Considering the
determinants of productivity, list and explain some things that would tend to prohibit or limit a
poor country's ability to catch up with the rich ones.
ANSWER: The argument that poor countries will tend to catch up with rich
ones is based on the idea that another unit of capital will increase
output more in a country that has little capital than one that has
much capital. So, for a given share of GDP devoted to investment, a
poor country will grow faster than a rich one.
This argument assumes that other things are the same, but share of
GDP invested may be lower in a poor country and the productivity
of investment may be less. A politically unstable environment where
property rights are unprotected or not secure tends to discourage
investment. A country that has limited trade because of legal
restrictions or geography cannot focus on producing what it
produces best and so has lower productivity. To get the most out of
investment, or even simply to use some types of new investment,
requires having workers who have acquired some basic human
capital.
63. Some data that at first might seem puzzling: The share of GDP devoted to investment was similar
for the United States and South Korea from 1960-1991. However, during these same years South
Korea had a 6 percent growth rate of average annual income per person, while the United States
had only a 2 percent growth rate. If the saving rates were the same, why were the growth rates
so different?
ANSWER: The explanation is based on the concept of diminishing returns to

capital. A country that has a lot of income, and so a lot of capital,
gains less by adding more capital than does a country that currently
has little capital. It is easy to envision how a poor country without
much capital could increase its output considerably with even a little
more capital.
64. In addition to investment in physical and human capital, what other public policies might a country
adopt to increase productivity?
ANSWER: In addition to investment in physical and human capital, a country

might increase productivity by (a) specifying and enforcing property
rights, (b) encouraging free trade, (c) controlling population growth -
- although the case has been made that a larger population creates
more ideas and so more technology, and (d) promoting research and
development.
65. Why does a nation’s standard of living depend on property rights?
ANSWER: Property rights are an important prerequisite for the price system to
work in a market economy. If an individual or company is not
confident that claims over property or over the income from
property can be protected, or that contracts can be enforced, there
will be little incentive for individuals to save, invest, or start new
businesses. Likewise, there will be little incentive for foreigners to
invest in the real or financial assets of the country. The distortion of
incentives will reduce efficiency in resource allocation and will
reduce saving and investment which in turn will reduce the standard
of living.
66. How do outward-oriented policies affect a nation's productivity?
ANSWER: Most economists believe that poor nations are better off pursuing
outward-oriented policies that promote free trade. Countries that use
their comparative advantage in trade are, in effect, helping
themselves through the gains from trade in the same way that
nations that develop new technology raise their standard of living.
Hence, a country that eliminates trade restrictions will experience
the same kind of economic growth that would occur after a major
technological advance. Inward-oriented trade policies are akin to a
country choosing to restrict the use of superior technologies.
67. At first patents might seem like a deterrent to growth because in effect they restrict the use of
new technology. Yet many economists believe that patents generate growth. Explain why.
ANSWER: Once someone comes up with an idea it is often easy for others to
take advantage of it so that the idea becomes part of a society’s
knowledge. So, knowledge is frequently a public good. Without
patents an inventor’s reward for research and development of a
good idea would be smaller. So, patents increase the incentives for
firms and individuals to engage in research. The negative
consequences of temporarily restricting the use of new ideas with
patents is outweighed by the increase in new ideas that patents
induce.
68. Some economists argue that it is possible to raise the standard of living by reducing population
growth. As an economist interested in incentives rather than coercion, what kind of policy would
you recommend to slow population growth?
ANSWER: Since bearing a child has an opportunity cost, policies designed to

increase the opportunity cost of bearing children would likely reduce
population growth rates. In particular, women with the opportunity to
receive a good education and desirable employment tend to want to
have fewer children than do those with fewer opportunities outside
the home. Hence, policies designed to increase educational and
employment opportunities for women will likely reduce population
growth rates without coercion.
69. Compare and contrast the population theories of Malthus and Kremer.
ANSWER: The difference is that Malthus predicted that population growth

would be greater than growth in the ability to increase output. He
believed that people would continue to populate the earth until
output reached a subsistence level. On the other hand Kremer
argues that population growth increased productivity allowing people
to improve their standard of living despite growing population.
Kremer argues that with more population comes more innovations.
The improvements in technology outweighed any adverse impact of
the increase in population on the standard of living.
Problems
1. In order to assess the level of prosperity in a nation in a given year, should we examine the level of
that nation’s real GDP per person, or should we examine the growth rate of that nation’s real GDP
per person?
ANSWER: The level of that nation’s real GDP provides the better assessment of
prosperity.
POINTS: 1
2. How would an economist typically assess the extent of economic progress in a nation?
ANSWER: An economist typically would examine the growth rate of the

nation’s real GDP.
POINTS: 1
3. The level of real GDP is a good measure of economic prosperity, and the growth of real GDP is a
good measure of
__________.
ANSWER: economic progress

POINTS: 1
4. In the United States over the past century, real GDP per person has grown by about
percent per year.
ANSWER: 2 (or, more precisely, 1.77)

POINTS: 1
5. Consider the nations of India, Indonesia, and Japan. Over the past century, which of these three
nations has experienced, by far, more rapid economic growth than the other two nations?
ANSWER: Japan’s growth rate (2.65 percent per year) easily surpasses the
growth rates of India (1.45 percent per year) and Indonesia (1.41
percent per year).
POINTS: 1
NOTES: r
6. Consider the nations of Brazil, Mexico, and Pakistan. Over the past century, which of these three
nations has experienced, by far, slower economic growth than the other two nations?
ANSWER: Pakistan’s growth rate (1.20 percent per year) is considerably lower
than the growth rates of Brazil (2.40 percent per year) and Mexico
(2.31 percent per year).
POINTS: 1
NOTES: r
7. Consider the nations of China, Japan, and the United States. Over the past century, which of these
nations has progressed, in an economic sense, more rapidly than the other two nations?
ANSWER: Japan’s growth rate (2.65 percent per year) is considerably higher
than the growth rates of China (2.15 percent per year) and the
United States (1.77 percent per year).
POINTS: 1
NOTES: r
8. Consider the nations of Canada, the United Kingdom, and the United States. Since 1870, which of
these nations has progressed, in an economic sense, more slowly than the other two nations?
ANSWER: The United Kingdom’s growth rate (1.43 percent per year) is
considerably lower than the growth rates of Canada (2.00 percent
per year) and the United States (1.77 percent per year).
POINTS: 1
NOTES: r
9. What word do we use to refer to the amount of goods and services produced for each hour of a
worker’s time?
ANSWER: The word in question is productivity.

POINTS: 1
10. John and Miguel are fishermen. When they go fishing, John consistently catches 2 or 3 fish per
hour, while Miguel consistently catches 5 or 6 fish per hour. Miguel’s exceeds that of
John.
ANSWER: productivity
POINTS: 1
11. Susan and Calvin paint houses. Susan consistently paints about 400 square feet of a house’s
exterior per hour, while Calvin consistently paints about 300 square feet per hour. Susan’s
exceeds that of Calvin.
ANSWER: productivity
POINTS: 1
12. List the four determinants of an economy’s productivity.
ANSWER: The four determinants are physical capital per worker, human
capital per worker, natural resources per worker, and technological
knowledge.
POINTS: 1
13. Which one of the factors of production originates as an output from the production process, and is
subsequently used as an input into the production process?
ANSWER: The input in question is capital.

POINTS: 1
14. “When workers acquire tools, they become more productive.” This statement reflects the general
fact that is a determinant of productivity.
ANSWER: physical capital per worker

POINTS: 1
15. Why do we refer to physical capital as a produced factor of production?
ANSWER: Physical capital originates as an output from the production process,

and is subsequently used as an input into the production process.
POINTS: 1
16. Is physical capital a produced factor of production? Is human capital a produced factor of
production?
ANSWER: Both physical capital and human capital are produced factors of
production.
POINTS: 1
17. Does a country have to be blessed with large quantities of natural resources in order to enjoy a
high standard of living? Briefly explain.
ANSWER: No. Japan is an example of a country that has few natural

resources, but international trade allows the Japanese to enjoy a
high standard of living nevertheless.
POINTS: 1
18. Because of its vast oil reserves, Saudi Arabia is a rich country. Saudi Arabia exemplifies the
general fact that differences in are responsible for some of the differences in standards of
living around the world.
ANSWER: natural resources

POINTS: 1
19. Is coal a produced factor of production?
ANSWER: No. Coal is a natural resource, and natural resources are not
classified as produced factors of production.
POINTS: 1
20. What term do we use to refer to the understanding of the best ways to produce goods and
services?
ANSWER: The term is technological knowledge.

POINTS: 1
21. Explain the distinction between technological knowledge and human capital.
ANSWER: Technological knowledge refers to society’s understanding about

how the world works. Human capital refers to the resources
expended transmitting this understanding to the labor force.
POINTS: 1
22. What do we mean when we say that some technological knowledge is not proprietary?
ANSWER: Technological knowledge is not proprietary if it is common

knowledge — after one person uses it, everyone becomes aware of
it.
POINTS: 1
TOPICS: DISC: Public Economics
23. “Market prices give no reason to believe that natural resources are a limit to economic growth.”
Explain this statement.
ANSWER: If the world were running out of natural resources, then the prices
of those resources would be rising over time. In fact, over long
periods of time, the prices of most natural resources, adjusted for
inflation, are stable or falling.
POINTS: 1
24. If a production function has the property called , then doubling all inputs causes the
amount of output to double as well.
ANSWER: constant returns to scale

POINTS: 1
25. In the production function Y = A F ( L , K , H , N ) , Y represents the quantity of output; L

represents the quantity of labor; K represents the quantity of physical capital; and H represents the
quantity of human capital. What does N represent?
ANSWER: N represents the quantity of natural resources.

POINTS: 1
26. In the production function Y = A F ( L , K , H , N ) , Y represents the quantity of output; L

represents the quantity of labor; K represents the quantity of physical capital; and N represents
the quantity of natural resources. What does H represent?
ANSWER: H represents the quantity of human capital.

POINTS: 1
27. Consider the production function Y = 4 F ( L , K , H , N ) . Suppose F(10,8,6,5)= 100 and

F(30,24,18,15)=300. Does the production function have the property of constant returns to
scale? Why or why not?
ANSWER: Yes, the production function has the property of constant returns to
scale. When the quantities of the inputs are 10, 8, 6, and 5, output is
. When all of the outputs are tripled so that their
quantities are 30, 24, 18, and 15, output is
Tripling all inputs triples output.
POINTS: 1
28. Consider the production function Y = 2 F ( L , K , H , N ) . Suppose F(12,10,9,7)=100 and

F(24,20,18,14)=180. Does the production function have the property of constant returns to
scale? Why or why not?
ANSWER: No, the production function does not have the property of constant
returns to scale.
When the quantities of the inputs are 12, 10, 9, and 7, output is
2 × 100=200. When all of the outputs are doubled so that their
quantities are 24, 20, 18, and 14, output is 2 × 180=360.
Doubling all inputs does not double output.
POINTS: 1
29. In what sense is capital accumulation costly to a society?
ANSWER: Capital accumulation requires that society consume less now and
save more of its current income. The foregone consumption is the
cost of future capital accumulation.
POINTS: 1
30. Because of , an increase in the saving rate leads to higher growth of income and
productivity only for a while.
ANSWER: diminishing returns

POINTS: 1
31. What are the long-run effects on productivity and income of an increase in the saving rate?
ANSWER: In the long run, a higher saving rate leads to higher levels of
productivity and income per person but not to higher growth in these
variables.
POINTS: 1
32. The people of Country X save 10 percent of their income, and the people of Country Y save 25
percent of their income. If these respective saving rates persist forever, will one country or the
other enjoy a higher rate of income growth forever? Explain.
ANSWER: In the long run, a higher saving rate leads to higher levels of
productivity and income per person but not to permanently higher
growth in these variables. Therefore, the difference in saving rates
between the two countries does not result in permanently- different
rates of income growth.
POINTS: 1
33. How does the phenomenon of diminishing returns to capital explain the catch-up effect?
ANSWER: When an economy initially has a small amount of capital, additions to

capital substantially raise workers’ productivity, making it possible
for poor countries with little capital to “catch up” with richer
countries.
POINTS: 1
34. In recent decades, economic growth has been much more rapid in South Korea than in the United
States. What is the likely explanation for this fact?
ANSWER: The likely explanation is that South Korea’s rapid growth is

attributable to the catch-up effect.
POINTS: 1
Figure 25-1
35. Refer to Figure 21-1. Does the figure represent the idea that the amount of capital per worker
influences the amount of output per worker, or does the figure represent the idea that the amount
of output per worker influences the amount of capital per worker?
ANSWER: The figure represents the idea that the amount of capital per worker
influences the amount of output per worker.
POINTS: 1
36. Refer to Figure 21-1. In order for the figure to make sense, do we have to assume that capital
is the only determinant of output? Briefly explain.
ANSWER: No, we do not have to assume that capital is the only determinant of
output. Rather, other determinants of output, including human
capital, natural resources, and technology, are held fixed in drawing
the figure.
POINTS: 1
TOPICS: DISC: OProducer Theory Production Function
37. Refer to Figure 21-1. “When the amount of capital per worker increases by one unit, a poor
country experiences a greater benefit than does a rich country.” Does the figure illustrate this
notion? Briefly explain.
ANSWER: Yes, the bowed-out (concave) nature of the production function

illustrates the notion that the marginal product of capital is greater
when the amount of capital is low than when it is high.
POINTS: 1
38. Refer to Figure 21-1. In what way is the figure relevant to the catch-up effect?
ANSWER: The catch-up effect is observed when a relatively poor country with
little capital and low productivity starts to experience rapid growth.
In such a country, small increases in capital substantially raise
workers’ productivity and make rapid growth possible. In the figure,
the production function is relatively steep for small amounts of
capital, and that feature is central to the catch-up effect.
POINTS: 1
39. What is the distinction between foreign direct investment and foreign portfolio investment?
ANSWER: A capital investment that is owned and operated by a foreign entity

is called foreign direct investment; a capital investment that is
financed with foreign money but operated by domestic residents is
called foreign portfolio investment.
POINTS: 1
40. What is the relationship between education and human capital?
ANSWER: Education amounts to investment in human capital.

POINTS: 1
41. Brazil gives cash payments to its poor citizens on the condition that those citizens’ children stay in
school. In terms of the determinants of productivity, how might this public policy contribute to
higher productivity in Brazil?
ANSWER: This public policy aims to increase the quantity and enhance the
quality of Brazilian human capital.
POINTS: 1
42. Studies have found that there is a relationship between height and productivity. Briefly explain.
ANSWER: Studies show that taller workers tend to earn more income per
hour. Because wages reflect a worker’s productivity, this suggests
that taller workers tend to be more productive.
POINTS: 1
TOPICS: DISC: Growth Theory Productivty
43. Research suggests that taller workers tend to earn more income than shorter workers. What does
this suggest about the relationship between workers’ height and their productivity?
ANSWER: If taller workers’ earnings are greater, as the data suggest, then it is
likely that taller workers are more productive than shorter workers.
POINTS: 1
44. An important prerequisite for the price system to work is an economy-wide respect for _______
rights.
ANSWER: property
POINTS: 1
45. What particularly important role do courts play in a market economy?
ANSWER: Courts enforce property rights by enforcing contracts and

discouraging direct theft.
POINTS: 1
TOPICS: DISC: Public Economics Property rights
46. What are inward-oriented policies? Do most economists recommend these types of policies to
poor countries?
ANSWER: Inward-oriented policies are intended to make a country’s people

better off by avoiding interaction with the rest of the world. Most
economists recommend outward-oriented policies to poor countries.
POINTS: 1
47. When a country imposes tariffs, intending to protect domestic firms from foreign competition, it is
pursuing_______–oriented policies.
ANSWER: inward
POINTS: 1
48. When a country eliminates tariffs and other trade restrictions, intending to promote economic
growth, it is pursuing_______–oriented policies.
ANSWER: outward
POINTS: 1
49. In what sense is it likely that geography has an effect on a country’s rate of economic growth?
ANSWER: Countries with natural seaports and easy access to the sea are more
likely to engage in trade with other nations. In turn, free trade
promotes economic growth and higher living standards.
POINTS: 1
TOPICS: DISC: International trade
50. Which well-known economist from the past asserted that “the power of population is infinitely
greater than the power in the earth to produce subsistence for man?”
ANSWER: The economist was Thomas Robert Malthus.

POINTS: 1

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Brief Principles of Macroeconomics 7th Edition Gregory Mankiw Solutions

Production and Growth

Multiple Choice – Section 00: Introduction

2. The average income in a rich country

same life expectancy as those in poor countries.

12. Average income has been stagnant for many years in

13. Which of the following is a good gauge of economic progress?

15. Productivity is the amount of goods and services

16. A nation’s standard of living is determined by

Multiple Choice – Section 01: Economic Growth around the World

1. A nation's standard of living is best measured by its

3. The level of real GDP person

4. As of 2010, using real GDP per person as a measure, we would classify

6. Which of the following statements is correct? In 2010,

7. In 2010, real GDP per person in Bangladesh was

8. In 2010, the typical Bangladeshi had about

13. Which of the following is correct?

14. Which of the following is not correct?

15. Which of the following statements is correct?

34. The United Kingdom is

36. In 1870, the richest country in the world was

37. Which of the following statements is correct?

38. Which of the following is correct?

Multiple Choice – Section 02: Productivity: Its Role and Determinants

1. Which of the following is correct?

3. Productivity is defined as the quantity of

4. Which of the following is a correct way to measure productivity?

5. Which of the following statements is true?

6. Which of the following is not correct?

7. In determining living standards, productivity plays a key role

8. The key determinant of the standard of living in a country is

12. Productivity is the

48. Refer to Table 25-1. Which of the following is correct?

49. Refer to Table 25-1. Which of the following is correct?

53. Which of the following items plays a role in determining productivity?

54. Industrial machinery is an example of

55. Industrial machinery is an example of

59. Which of the following is not an example of physical capital?

60. Which of the following is an example of physical capital?

61. Which of the following is an example of physical capital?

62. Which of the following is an example of physical capital?

63. Which of the following is an example of a produced factor of production?

64. Which of the following is an example of a produced factor of production?

65. Human capital is the

67. Which of the following is an example of human capital?

68. Which of the following is an example of human capital?

71. Which of the following is an example of human capital?

77. Which of the following statements is correct?

79. Japan’s status as a rich nation is attributable to

80. Natural resources

81. Which of the following is an example of a nonrenewable resource?

82. Which of the following is an example of a renewable natural resource?

83. Which of the following is an example of a renewable natural resource?

84. Which of the following is an example of a nonrenewable natural resource?

86. In a market economy, scarcity of resources is most clearly reflected in

90. If the price of a good has risen over time,

92. Greater scarcity of a natural resource is indicated

101. Which of the following is correct?

108. Technological knowledge refers to

109. Technological knowledge

110. Proprietary technology is knowledge that is

111. Proprietary technology is technology that is

112. Proprietary technology is technology

113. Human capital is