Econ 204: Review questions for final exam

1. When switching from the current exchange rate method to the purchasing
power parity method, Mexicos living standard in dollars
a. decreases
b. increases
c. rises to the level of the US
d. stays the same
e. leapfrogs over that of the US

2. Convergence have been occurring among the OECD countries because

a. the poorer countries have had higher growth rates than richer
b. the richer countries give away more of their output than the poorer
c. the richer countries have had higher growth rates than the poorer
d. the poorer countries have had positive growth rates, while the richer ones
have had negative growth rates.

3. For this question, assume that there are decreasing returns to capital, decreasing
returns to labor and constant returns to scale. Now suppose that both capital and
labor increase by 10%. Given this information, we know that output (Y) will
a. increase by less than 20% but more than 10%
b. not change
c. increase by less than 10%
d. increase by 10%
e. none of the above

4. Which of the following will cause a reduction in output per worker in the long
run?
a. capital accumulation
b. capital accumulation or technological progress
c. an increase in the number of workers
d. expansionary monetary policy
e. none of the above

5. For this question, assume that a country experiences a permanent increase in its
saving rate. Which of the following will occur as a result of this increase?
a. a permanently faster growth rate of output
b. a permanently higher level of capital per worker
c. a permanently higher level of output per capita
d. all of the above
e. both b and c

6. Which of the following must occur to sustain economic growth in the long run?
a. a higher saving rate
b. technological progress
c. capital accumulation
 d. all of the above

7. Suppose there are two countries that are identical with the following exception.
The saving rate in country A is greater than the saving rate in country B. Given
this information, we know that in the long run
a. economic growth will be higher in A and B
b. output per capita will be higher in B than A
c. output per capita will be greater in A than B
d. More information is needed to answer the question

8. We know that output per worker (Y/N) will increase when which of the following
occurs?
a. an increase in K
b. an increase in the saving rate
c. an increase in K/N
d. all of the above

9. An increase in the saving rate will not affect which of the following variables in
the long run?
a. the growth rate of output per worker
b. capital per worker
c. output per worker
d. the amount of capital in the economy
e. none of the above

10. Which of the following situations will result in a reduction in the capital-labor
ratio?
a. investment per worker equals saving per worker
b. investment per worker exceeds depreciation per worker
c. investment per worker is less than saving per worker
d. output per worker exceeds capital per worker
e. saving per worker equals depreciation per worker

11. For this question, assume that technological progress does not occur. Which of
the following variables will NOT change when the economy reaches steady state
equilibrium?
a. capital per worker
b. investment per worker
c. output per worker
d. all of the above
e. only a and b

12. Suppose there is a reduction in the saving rate. This reduction in the saving rate
must cause a reduction in consumption per capita in the long run when
a. the rate of saving exceeds the rate of depreciation
b. there is no technological progress
 c. technological progress depends on human capital
d. capital per worker already is less than the golden-rule level
e. the saving is used for education rather than physical capital

13. When steady state capital per worker is below the golden-rule level, we know
with certainty that an increase in the saving rate will
a. decrease consumption in the short run, and increase it in the long run
b. decrease consumption in both the short and the long run
c. increase consumption in both the short and the long run
d. increase consumption in the short run but decrease it in the long run
e. none of the above

14. Suppose two countries are identical in every way with the following exception.
Economy A has a higher rate of depreciation that economy B. Given this
information, we know with certainty that
a. steady state consumption in A and B are equal
b. steady state growth of output per worker is higher in A than in B
c. steady state consumption in A is higher than in B
d. steady state consumption in A is lower than in B
e. none of the above

15. Suppose the following situation exists for an economy: Kt+1/N = Kt/N. Given this
information we know that
a. saving per worker equals depreciation per worker in period t.
b. saving per worker is les than depreciation per worker in period t.
c. steady state consumption is equal to the golden rule level of consumption
d. the saving rate fell in period t.
e. saving per worker is greater than depreciation per worker in period t

16. Suppose the economy is initially in the steady state. A reduction in the depreciation rate
will cause
a. a reduction in C/N
b. a reduction in Y/N
c. a reduction in K/N
d. all of the above
e. none of the above

17. Which of the following best describes a situation where research is considered
appropriable?
a. research that is easily copied by another firm
b. research that is well suited to its commercial purpose
c. research that translates into many new products
d. all of the above
e. none of the above

18. Assume the production function is represented by the following: Y=f(K,NA). Given this
production function and the constant returns to scale assumption, output will increase by
5% when which of the following occurs?
a. K or NA increase by 5%
 b. K and N increase by 5%
c. N and A increase by 5%
d. N or A increase by 5%
e. all of the above

Use the following information to answer the following questions.

The rate of depreciation is 12% per year, the population growth rate is 2% per year and the
growth rate of technology is 3% per year.

19. Which of the following equals the annual growth rate of effective labor in the steady
state in this economy?
a. 2%
b. 3%
c. 5%
d. 12%
e. 17%

20. Which of the following represents the level of investment needed to maintain a constant
capital stock (K)?
a. .02K
b. .03K
c. .05K
d. .12K
e. .17K

21. Assume that an economy experiences both positive population growth and technological
progress. In this economy, which of the following is constant when balanced growth is
achieved?
a. Y/NA
b. I
c. S
d. all of the above
e. none of the above

22. Assume that an economy experiences both positive population growth and technological
progress. Once the economy has achieved balanced growth, we know that the capital per
effective worker ratio (K/NA) is
a. growing at a rate of + gA + gN
b. growing at a rate of gA + gN
c. growing at a rate of gA
d. growing at a rate of gN
e. none of the above

23. Assume that an economy experiences both positive population growth and technological
progress. Once the economy has achieved balanced growth, we know that
a. I/NA = K/NA
b. I = K
c. S/NA = (gA+gN)K/NA
d. S/NA = (+gA+gN)K/NA
 e. none of the above

24. Let represent labors share of total output. The Solow residual therefore is represented
by
a. gA
b. gN
c. gK
d. gy
e. 1/

25. Assume that the production function for an economy is represented by the following: Y =
NA. Which of the following expressions is equal to labor productivity for this economy?
a. A
b. Y/A
c. 1/A
d. N/A
e. none of the above

26. Employment will increase as a result of an increase in productivity when which of the
following occurs?
a. the AD curve shifts to the right
b. output growth exceeds productivity growth
c. productivity growth exceeds output growth
d. the AS curve shifts downward
e. none of the above

27. Employment will remain constant as a result of an increase in productivity when which
of the following occurs?
a. output growth exceeds productivity growth
b. productivity growth exceeds output growth
c. the AD curve shifts to the right
d. the AS curve shifts downward
e. none of the above

28. Based on our understanding of the wage setting equation, which of the following will
NOT cause a reduction in the nominal wage?
a. a reduction in the expected productivity
b. an increase in unemployment
c. a reduction in the expected price level
d. all of the above
e. none of the above

29. For this question, assume that expectations of productivity growth adjust slowly over
time. For this economy, a reduction in productivity will most likely cause which of the
following to occur?
a. an increase in the natural rate of unemployment
b. an increase in the markup over labor costs
c. a reduction in the real wage
d. all of the above
e. none of the above
 30. For this question, assume that the aggregate production function is represented by
Y=AN. Which of the following represents the price setting relation for this economy?
a. (1 + )W
b. (1 + )A
c. (1 + )A/W
d. W/A
e. none of the above

Answers:

1b
2a
3d
4c
5e
6c
7c
8d
9e
10 c
11 d
12 d
13 e
14 d
15 a
16 d
17 d
18 b
19 c
20 c
21 a
22 a
23 d
24 a
25 a
26 b
27 e
28 e
29 a
30 e