Question 1

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) the saving rate fell in period t.
C) saving per worker is greater than depreciation per worker in period t.
D) the saving rate rose in period t.
E) saving per worker is less than depreciation per worker in period t.

Accepted Answer

Kt+1/N > Kt/N implies that the capital stock per worker in period t+1 is greater than the capital stock per worker in period t, which means that the economy is accumulating more capital. This can only happen if the saving per worker is greater than depreciation per worker as the increase in capital stock per worker is the result of net investment, which is equal to saving per worker minus depreciation per worker. Therefore, choice C is the correct answer.

Question 2

Assume that technological progress does not occur. Which of the following variables will not change when the economy reaches steady- state equilibrium?
A) Output per worker.
B) Investment per worker.
C) Capital per worker.
D) All of the above.
E) Only A and B.

Accepted Answer

In a steady-state equilibrium without technological progress, output per worker, investment per worker, and capital per worker all remain constant. This is because, in the steady state, all these variables stabilize as the economy stops growing, assuming no technological advancement to spur further growth.

Question 3

Suppose two countries are identical in every way with the following exception. Economy A has a higher rate of depreciation (6) than economy B. Given this information, we know with certainty that:
A) steady state consumption in A and B are the same.
B) steady state growth of output per worker is higher in B than in A.
C) steady state growth of output per worker is higher in A than in B.
D) steady state consumption in A is lower than in B.
E) steady state consumption in A is higher than in B.

Accepted Answer

Higher depreciation rates in Economy A mean that a larger portion of its output must be devoted to replacing capital that wears out, leaving less for consumption. Therefore, steady state consumption in A is lower than in B.

Question 4

Suppose two countries are identical in every way with the following exception. Economy A has a greater quantity of human capital than economy B. Given this information, we know with certainty that:
A) steady state output per worker in A is higher than in B.
B) steady state growth of output per worker is higher in A than in B.
C) steady state consumption in A and B are the same.
D) steady state output per worker in A is lower than in B.
E) steady state growth of output per worker is higher in B than in A.

Accepted Answer

Human capital refers to the knowledge, skills, and talents that workers possess. A higher quantity of human capital in economy A would mean that its workers are more productive and efficient, resulting in higher output per worker. Therefore, steady state output per worker in A is higher than in B.

Question 5

The golden rule level of capital refers to:
A) the level of capital that maximises output per worker.
B) the level of capital that maximises consumption per worker in the steady state.
C) the level of capital that maximises the level of output in the steady state.
D) the level of capital that maximises consumption per worker.
E) the level of capital that maximises the standard of living.

Accepted Answer

The golden rule level of capital refers to the level of capital that maximizes consumption per worker in the steady state. This occurs when the marginal product of capital equals the rate of depreciation plus the rate of population growth. At this level of capital, the economy achieves its optimal level of consumption and investment, leading to a sustainable level of economic growth and well-being.

Question 6

Suppose two countries are identical in every way with the following exception: Economy A has a higher saving rate than economy B. Given this information, we know with certainty that:
A) steady state growth of output per worker is higher in A than in B.
B) steady state consumption in A and B are the same.
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.

Accepted Answer

In the Solow growth model, a higher saving rate leads to a higher steady-state level of capital per worker and output per worker, but it does not necessarily imply higher steady-state consumption. The relationship between saving rate and steady-state consumption is ambiguous without additional information.

Question 7

Which of the following are reasons to suspect spending on education might overestimate human capital investment?
A) Much human capital investment comes from on- the- job training.
B) Education spending leaves out foregone wages.
C) Part of total spending on education is really consumption.
D) All of the above.
E) None of the above.

Accepted Answer

A) Much human capital investment comes from on-the-job training, which cannot be captured by education spending alone.
B) Education spending leaves out foregone wages, which can be a significant cost for those who choose to invest in education.
C) Part of total spending on education is really consumption, such as spending on extracurricular activities or social events, which do not directly contribute to human capital development.

Question 8

Suppose an economy experiences a decrease in the saving rate. We know with certainty that this decrease in the saving rate will:
A) decrease the growth of output per worker only temporarily.
B) increase the steady state growth of output per worker.
C) increase the growth of output per worker only temporarily.
D) have an ambiguous effect on the growth of output per worker.
E) decrease the steady state growth of output per worker.

Accepted Answer

A decrease in the saving rate will lead to a temporary decrease in the growth of output per worker as the economy adjusts to a new lower steady-state level of capital per worker, but it does not affect the long-term growth rate, which is determined by factors like technological progress.

Question 9

Suppose there are two countries that are identical in every way with the following exception: Country A has a lower depreciation rate (6) than country B. Given this information, we know with certainty that:
A) K/N will be the same in the two countries.
B) the growth rate will be higher in B than in A.
C) K/N will be higher in A.
D) K/N will be higher in B.
E) the growth rate will be higher in A than in B.

Accepted Answer

A lower depreciation rate means that capital (K) will be more durable in Country A, leading to a higher capital-to-labor ratio (K/N). However, this does not necessarily mean that the growth rate will be higher in B than in A, as there are other factors that could influence economic growth.

Question 10

Suppose an economy experiences an increase in the saving rate. We know with certainty that this increase in the saving rate will:
A) increase steady state consumption only if the new saving rate is less than the golden rule rate.
B) decrease steady state consumption only if the new saving rate is less than the golden rule rate.
C) have no effect on steady state consumption.
D) increase steady state consumption.
E) decrease steady state consumption.

Accepted Answer

An increase in the saving rate will increase steady state consumption only if the new saving rate is less than the golden rule rate of saving, which maximizes steady state consumption per worker. If the saving rate is below this optimal level, increasing it can lead to higher investment, more capital accumulation, and thus higher consumption in the long run.

Question 11

Suppose the economy is initially in the steady state. An increase in the depreciation rate (6) will cause:
A) a decrease in Y/N.
B) a decrease in C/N.
C) a decrease in K/N.
D) All of the above.
E) None of the above.

Accepted Answer

An increase in the depreciation rate reduces the amount of capital that remains in the economy after depreciation. This leads to a decrease in the capital-to-labor ratio (K/N), which in turn reduces output per worker (Y/N) and consumption per worker (C/N), as the economy adjusts to a new, lower steady state of capital.

Question 12

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher saving rate than country B. Given this information, we know with certainty that:
A) the growth rate will be higher in B than in A.
B) the growth rate will be the same in the two countries.
C) the level of consumption per worker will be higher in B.
D) the level of consumption per worker will be higher in A.
E) the growth rate will be higher in A than in B.

Accepted Answer

The answer of Suppose there are two countries that are...

Question 13

Which of the following statements is always true?
A) The increase in investment is equal to the capital stock minus depreciation.
B) Investment equals depreciation.
C) Any change in the capital stock is equal to investment minus depreciation.
D) The capital stock is equal to investment minus depreciation.
E) Investment equals the capital stock minus depreciation.

Accepted Answer

Any change in the capital stock (which includes investment and depreciation) can be calculated by taking the difference between investment and depreciation. Therefore, option C is always true. Options A, B, D, and E are not always true statements.

Question 14

Suppose the economy is operating at the steady state. Which of the following is true given this information?
A) Steady state saving is more than total consumption.
B) Steady state saving is just sufficient to cover depreciation.
C) Steady state saving exceeds depreciation each year by a constant amount.
D) Steady state saving equals consumption.
E) Steady state saving is less than total consumption.

Accepted Answer

In steady state, the economy is in a long-run equilibrium where output, consumption, investment, and capital stock remain constant over time. In this situation, steady state saving is just sufficient to cover depreciation because investment equals depreciation in the steady state, and any excess saving would lead to an increase in the capital stock, which would eventually lead to diminishing returns and a decrease in output. Therefore, option B is the correct answer. Options A, C, D, and E are incorrect as they do not accurately reflect the nature of the steady state.

Question 15

Suppose there is a decrease in the rate of saving. This decrease in the saving rate must cause a decrease in consumption per person in the long run when:
A) the rate of saving exceeds the rate of depreciation.
B) technological progress depends on human capital.
C) the saving is used for education rather than physical capital.
D) capital per worker is already less than the golden- rule level.
E) there is no technological progress.

Accepted Answer

According to the Solow growth model, there is a steady-state level of capital per worker at which consumption per person is maximized, called the golden-rule level. If the rate of saving decreases and capital per worker is already below the golden-rule level, then there will be a decrease in consumption per person in the long run. Choices A, B, C, and E do not directly address the relationship between saving rate and consumption per person.

Question 16

Which of the following will cause a decrease in output per worker in the long run?
A) An increase in the depreciation rate.
B) A decrease in the stock of human capital.
C) A decrease in the stock of physical capital.
D) A decrease in the saving rate.
E) All of the above.

Accepted Answer

All of the listed factors would cause a decrease in output per worker in the long run. An increase in the depreciation rate would reduce the stock of physical capital, reducing output. A decrease in the stock of human capital would reduce the productivity of workers and lower output. A decrease in the stock of physical capital would directly reduce the amount of capital available for production, reducing output. A decrease in the saving rate would reduce the rate at which capital accumulates, again reducing output per worker.

Question 17

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) increase consumption in the short run, and decrease it in the long run.
B) decrease consumption in the short run, and increase it in the long run.
C) decrease consumption in both the short run and the long run.
D) increase consumption in both the short run and the long run.
E) None of the above.

Accepted Answer

The answer of When steady state capital per worker is...

Question 18

Suppose an economy experiences a 5% increase in human capital. We know that this will cause:
A) Y/N to increase by exactly 5%.
B) no change in Y/N.
C) a decrease in Y/N.
D) Y/N to increase by more than 5%.
E) Y/N to increase by less than 5%.

Accepted Answer

An increase in human capital typically leads to an increase in output per worker (Y/N), but the increase is usually less than proportional due to diminishing returns to human capital.

Question 19

The main macroeconomic implication of a pay- as- you- go social securtiy system is:
A) total saving decreases and capital accumulation decreases.
B) no effect on total saving and capital accumulation decreases.
C) no effect on total saving and no effect on capital accumulation.
D) total saving increases and capital accumulation increases.
E) no effect on total saving and capital accumulation increases.

Accepted Answer

In a pay-as-you-go social security system, current workers pay for the benefits of current retirees. This means that instead of contributing to savings and investment, the money is used to pay for current consumption. As a result, total saving decreases, and without sufficient saving and investment, capital accumulation also decreases.

Question 20

At the current steady state capital- labour ratio, assume that the steady state level of per capita consumption, (C/N)*, is less than the golden rule level of steady state per capita consumption. Given this information, we can be certain that:
A) An increase in the saving rate will cause an increase in the steady state level of per capita consumption ((C/N)*).
B) A decrease in the capital- labour ratio will cause a decrease in (C/N)*.
C) The capital- labour ratio will tend to increase over time.
D) A decrease in the saving rate will have an ambiguous effect on (C/N)*.
E) The capital- labour ratio will tend to decrease over time.

Accepted Answer

The fact that the steady state level of per capita consumption is less than the golden rule level of steady state per capita consumption means that the economy is undersaving. Therefore, a decrease in the saving rate will likely worsen the situation and lead to a decrease in (C/N)*. However, an increase in the saving rate may or may not lead to an increase in (C/N)*, as it will depend on the speed at which the capital stock grows relative to the labor force. Therefore, D is the only certain choice.

Quiz 11: Saving, Capital Accumulation and Output

Suppose the following situation exists for an economy: Kt+1/N > Kt/N. Given this information, we know that:

Assume that technological progress does not occur. Which of the following variables will not change when the economy reaches steady- state equilibrium?

Suppose two countries are identical in every way with the following exception. Economy A has a higher rate of depreciation (6) than economy B. Given this information, we know with certainty that:

Suppose two countries are identical in every way with the following exception. Economy A has a greater quantity of human capital than economy B. Given this information, we know with certainty that:

The golden rule level of capital refers to:

Suppose two countries are identical in every way with the following exception: Economy A has a higher saving rate than economy B. Given this information, we know with certainty that:

Which of the following are reasons to suspect spending on education might overestimate human capital investment?

Suppose an economy experiences a decrease in the saving rate. We know with certainty that this decrease in the saving rate will:

Suppose there are two countries that are identical in every way with the following exception: Country A has a lower depreciation rate (6) than country B. Given this information, we know with certainty that:

Suppose an economy experiences an increase in the saving rate. We know with certainty that this increase in the saving rate will:

Suppose the economy is initially in the steady state. An increase in the depreciation rate (6) will cause:

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher saving rate than country B. Given this information, we know with certainty that:

Which of the following statements is always true?

Suppose the economy is operating at the steady state. Which of the following is true given this information?

Suppose there is a decrease in the rate of saving. This decrease in the saving rate must cause a decrease in consumption per person in the long run when:

Which of the following will cause a decrease in output per worker in the long run?

When steady state capital per worker is below the golden- rule level, we know with certainty that an increase in the saving rate will:

Suppose an economy experiences a 5% increase in human capital. We know that this will cause:

The main macroeconomic implication of a pay- as- you- go social securtiy system is:

At the current steady state capital- labour ratio, assume that the steady state level of per capita consumption, (C/N) *, is less than the golden rule level of steady state per capita consumption. Given this information, we can be certain that: