Intermediate Macroeconomics

Tutorial 3

“I do not see how one can look at figures like these without seeing them as representing
possibilities. Is there some action a government of India could take that would lead the Indian
economy to grow like Indonesia's or Egypt’s? If so, what, exactly? If not, what is it about the
‘nature of India’ that makes it so? The consequences for human welfare involved in questions
like these are simply staggering: Once one starts to think about them, it is hard to think about
anything else,” Robert Lucas, 1988.

1. Which of the following statements is correct?

A. Growth theory explains what part of growth in total output is due to growth inputs.
B. Growth theory help us understand how economic decisions determine the
accumulation of factors of production.
C. Growth accounting theory helps us understand how the rate of savings today affects
the stock of capital in future.
D. Growth accounting theory is a set of standards and practices to be followed when
measuring economic growth.
E. Growth accounting theory helps us understand how changes in savings rates can affect
living standards.

2. The neoclassical growth model predicts that when:

A. s > (n+d)k, capital per capita is declining.
B. s < (n+d)k, total output increases, but per capita output does not change
C. s > (n+d)k, output and capital per capita are rising.
D. s < (n+d)k, the production function will shift downward.
E. s > (n+d)k, output is increasing at a rate equal to the population growth rate.

3. Technology, 𝐴𝐴, is referred to as ‘total factor productivity’ if it:

A. augments labour only.
B. augments capital.
 C. does not change over time.
D. partially augments labour, not capital.
E. augments all factors, not just labour.

4. The endogenous growth model predicts that:

A. economies grow continuously over time.
B. economies will reach a steady-state equilibrium
C. developing countries tend to grow faster than developed countries.
D. developed countries tend to grow faster than developing countries.
E. the population tends to grow faster in low income countries.

5. If the economy’s production function is given by 𝑌𝑌 = 𝐾𝐾 0.5 𝐿𝐿0.5 , what is the marginal
product of labour?
𝑌𝑌
A. −0.5 𝐿𝐿
𝑌𝑌
B. 0.5 𝐿𝐿
𝑌𝑌
C. 0.5 𝐾𝐾
𝐾𝐾
D. 0.5 𝐿𝐿
E. Impossible to determine.

6. Conditional convergence is predicted for economies with different savings or

depreciation rates; that is, steady-state_____ will differ, but______ will eventually
equalize.
A. output growth rates; output per person.
B. technology; output per person.
C. output per person; technology.
D. investment; and consumption.
E. output per person; output growth rates.
7. The neoclassical growth model predicts that economies will eventually reach a state where:
A. ∆𝑦𝑦 = ∆𝑘𝑘 = 0.
B. ∆𝑌𝑌/𝑌𝑌 = (𝑛𝑛 + 𝑑𝑑)𝑘𝑘.
C. 𝑠𝑠𝑠𝑠 = 0.
 D. population growth and depreciation are the same.
E. Both A and C are correct.

8. Which of the following is INCORRECT about the Solow growth model with
endogenous population growth?
A. 𝑠𝑠𝑠𝑠(𝑘𝑘) = (𝑛𝑛(𝑦𝑦) + 𝑑𝑑)𝑘𝑘
B. There are two stable equilibriums.
C. The first and lower steady state is known as the ‘poverty trap’.
D. The lower steady-state is characterized by higher population growth.
E. 𝑠𝑠𝑠𝑠(𝑘𝑘) = (𝑛𝑛 + 𝑑𝑑)𝑘𝑘

9. In a growth model with endogenous population growth and an investment

requirement that rises sharply at first then rises slowly and eventually flattens out, we can
get
A) three steady-state equilibria, only one of which is stable
B) three steady-state equilibria, only two of which are stable
C) three steady-state equilibria, all of which are stable
D)three steady-state equilibria, none of which is stable.

10. The Keynesian AS-curve differs from the classical AS-curve, since Keynes
A. thought that labour markets worked smoothly to always establish full employment
B. thought that nominal wages were flexible even when there was unemployment
C. thought that nominal wages were rigid even when there was unemployment
D. described the AS-curve as completely vertical
E. assumed that firms tried to exploit the work force by paying them substandard wages

11. The Keynesian aggregate supply curve implies that

A. The economy is always at the full-employment level of output
B. The price level is unaffected by current levels of GDP
C. Wages are perfectly flexible
D. Real money balances decrease as the AD-curve shifts to the right
E. An increase in nominal money supply will not affect the level of real GDP

PART B: WRITTEN

Using a well and clearly labelled diagram, draw and fully explain a two-sector growth
model, with two types of investment opportunities—one with a diminishing marginal
product and one with a constant marginal product.