Exam Prep Chapter.8 Economic Growth

Chapter 8: Economic Growth

Multiple Choice

1. Over the past century, the average household income in the United States

A) has increased in nominal terms but has decreased in real terms.

B) has increased in nominal terms but has remained constant in real terms.

C) has increased in real terms.

D) has increased only marginally both in real and nominal terms.

Difficulty: Easy

2. Approximately what percentage of families in the U.S. own homes?

A) 10%

B) 25%

C) 50%

D) 67%

Difficulty: Easy

3. What is the relationship between average household income and standard of living?

A) There is no relationship. Increasing average income says nothing about income distribution.

B) Rising income enables households to acquire more of the goods and services that improve their material standard of living.

C) Rising income tends to increase the crime rate and violence, thereby lowering a country’s standard of living.

D) There is no relationship. Standard of living depends on productivity not household income.

Difficulty: Easy

4. Economists define economic growth as

A) changes in real GDP from year to year that occur as aggregate demand and short-run aggregate supply change.

B) an increase in the standard of living of a nation.

C) an increase in nominal GDP combined with price stability.

D) the process through which the economy’s potential output is increased.

Difficulty: Easy

5. Economic growth

I. is represented by an outward shift of the production possibilities curve.

II. is defined in terms of a series of events that increase the economy’s ability to produce goods and services.

III. refers to a process that increases potential output.

IV. occurs when the economy operates on its production possibilities frontier.

A) I and IV only

B) I, II, and III

C) I, III, and IV

D) I, II, III, and IV

Difficulty: Medium

6. Which of the following applies to economic growth?

I. Economic growth allows people to buy more goods and services.

II. Economic growth is the expansion of the economy’s production possibilities.

III. Economic growth is represented by a movement from a point inside the production possibilities curve to a point on the curve.

A) I, II, and III

B) I and II only

C) I and III only

D) I only

Difficulty: Medium

7. Economic growth is defined as

A) growth in nominal gross domestic product over time.

B) the process by which a country’s potential output grows over time.

C) the process by which scarcity is eliminated over time.

D) growth in money supply over time.

Difficulty: Easy

8. Economic growth is best measured by the increase in

A) nominal GDP.

B) potential output.

C) disposable personal income in current dollars.

D) disposable personal income in real dollars.

Difficulty: Medium

9. Using actual values of real GDP to measure economic growth

A) yields misleading results because changes in real GDP are affected by cyclical changes that do not represent economic growth.

B) is the most widely accepted method of measuring economic growth.

C) introduces problems because of inaccuracies in the measurement of real GDP.

D) is superior to using actual values of nominal GDP because it allows us to isolate the effects of price changes.

Difficulty: Medium

10. Economists do not use actual values of real GDP to measure economic growth because

A) real GDP holds price level constant, but in reality price level changes from year to year.

B) changes in real GDP could be due to fluctuations in the level of economic activity.

C) economic growth encompasses more than just growth in output.

D) changes in real GDP do not provide any information about income distribution.

Difficulty: Medium

11. Which of the following statements is true?

A) Measuring economic growth as the rate of increase in actual real GDP is a valid measure.

B) Measuring economic growth as the rate of increase in actual real GDP leads to an inaccurate measure of economic growth.

C) Economic growth must be measured in nominal terms converted to real values each year.

D) Economic growth must be measured in real GDP terms and converted to nominal terms each year.

Difficulty: Medium

12. The theory of economic growth focuses on the

A) growth of real income equality in the long run; not on the growth of real income in the short run.

B) growth of resources in the long run, not on the efficiency of resource use in the short run.

C) growth of potential output over the long run, not on fluctuations in the level of economic activity in the short run.

D) advancements in technology over the long run, not on short-run increases in real GDP.

Difficulty: Medium

Use the following to answer questions 13-15.

Exhibit: Production Possibilities Curves 1

13. (Exhibit: Production Possibilities Curves 1) Economic growth is represented by a movement

A) from C to D.

B) from D to E.

C) from F to A.

D) from B to C.

Difficulty: Medium

14. (Exhibit: Production Possibilities Curves 1) A movement from F to B

A) will increase real GDP and represents economic growth.

B) will increase real GDP but does not represent economic growth.

C) implies that the country’s productive ability has increased.

D) will not increase real GDP or potential output.

Difficulty: Medium

15. (Exhibit: Production Possibilities Curves 1) A cyclical increase in real GDP is represented by a movement

A) from D to C.

B) from D to E.

C) from F to A.

D) from A to B.

Difficulty: Medium

Use the following to answer questions 16-18.

Exhibit: Production Possibilities Curves 2

16. (Exhibit: Production Possibilities Curves 2) Assume that a nation is operating on production possibilities curve CD. Economic growth is best illustrated by a

A) shift from curve CD to curve AB.

B) shift from curve CD to curve EF.

C) movement from point Q to point O on the frontier CD.

D) movement from point R inside the frontier CD to point P on the frontier CD.

Difficulty: Medium

17. (Exhibit: Production Possibilities Curves 2) The movement from point R inside the frontier CD to point P on the frontier CD

I. will increase real RGDP.

II. will increase the size of the nation’s labor force.

III. represents economic growth.

A) I only

B) I and II only

C) I and III only

D) I, II, and III

Difficulty: Medium

18. (Exhibit: Production Possibilities Curves 2) A cyclical increase in the level of economic activity is represented by a

A) shift from curve CD to curve AB.

B) shift from curve CD to curve EF.

C) movement from point Q to point O on the frontier CD.

D) movement from point R inside the frontier CD to point P on the frontier CD.

Difficulty: Medium

19. Economic growth is an exponential process. What does this mean?

A) It means that the returns to huge capital investments made today will diminish at an increasing rate over time.

B) It means that small differences in sustained growth rates have significant effects on a nation’s real income over long periods of time.

C) It means that countries must allocate increasing amounts of resources to capital goods to see constant increases in the growth rate of potential output.

D) It means that if a country allocates a fixed amount of resources to capital goods, its potential output will increase at an increasing rate over long periods of time.

Difficulty: Medium

20. The rule of 72 states that grows at some exponential rate of z percent

A) will double in value in approximately 72 years.

B) will double in value in approximately 72 ÷ z years.

C) will double in value in approximately 72 × z years.

D) will double in value in approximately 72^z years.

Difficulty: Easy

21. Suppose a country’s potential level of real GDP grows at a rate of 6% per year. Use the rule of 72 to calculate how long it takes for the country’s potential output to double.

A) 6 years

B) 12 years

C) 24 years

D) 30 years

Difficulty: Medium

22. Use the rule of 72 to determine how long it takes for real GDP to double if real GDP grows at 3% per year.

A) 12 years

B) 24 years

C) 36 years

D) 72 years

Difficulty: Medium

23. Suppose that GDP of a small tropical island grows at 4% per year. This year, output is equal to 100,000 units of output. Using the rule of 72, how long will it take before GDP is equal to 400,000 units of output?

A) 18 years

B) 36 years

C) 45 years

D) 72 years

Difficulty: Difficult

24. All else constant, if a nation’s potential output doubles in 36 years, its average annual growth rate is

A) approximately 1% .

B) approximately 2%.

C) approximately 3%.

D) approximately 4%.

Difficulty: Medium

25. All else constant, if real GDP doubles in 12 years, its average annual growth rate is

A) approximately 6% .

B) approximately 5%.

C) approximately 4%.

D) approximately 3%.

Difficulty: Medium

26. Suppose that real GDP per capita of a rich country is $40,000. Real GDP per capita in a poor country is $10,000. Suppose that rate of growth of GDP per capita in the rich country is 3.6% per year and in the poor country is 7.2% per year. Using the rule of 72, calculate how many years it will take for real GDP per capita in the poor country to catch up with GDP per capita in the rich country?

A) 10 years

B) 20 years

C) 30 years

D) 40 years

Difficulty: Difficult

27. Suppose that real GDP per capita of Monrovia is $30,000. RGDP per capita in Westova is $15,000. Suppose that rate of growth of real GDP per capita in Monrovia is 3.17% per year and in Westova it is 6.34% per year. Using the rule of 72, calculate how many years it will take for RGDP per capita in Westova to catch up with RGDP per capita in Monrovia.

A) approximately 11 years

B) approximately 23 years

C) approximately 34 years

D) approximately 46 years

Difficulty: Difficult

28. The rate of economic growth per capita in Mamoogia from 20006 to 2010 was 1.8% per year, while in Kennan, over the same period it was 3.6%. In 2010, per capita real GDP was $28,900 in Mamoogia and $12,700 in Kennan. Assume the growth rates for each country remain the same. Which country will have a higher level of potential output in 2050?

A) Kennan

B) Mamoogia

C) Their potential output will be the same.

D) It will depend on the rate of population growth in each country.

Difficulty: Difficult

29. Suppose real GDPs in Hauck and Meran are identical at $10 trillion in 2010. Suppose Hauck’s economic growth rate is 2% and Meran’s is 4% and the rates remain constant over time. Calculate the percentage difference in their levels of potential output in 2046.

A) There will be no difference in their levels of potential output.

B) Meran’s potential output will be 50% higher than that of Hauck’s.

C) Hauck’s potential output will be 100% higher than that of Meran’s.

D) Meran’s potential output will be 100% higher than that of Hauck’s.

Difficulty: Difficult

30. The rate of economic growth per capita in Mamoogia from 2006 to 2010 was 3.6% per year, while in Kennan, over the same period it was 7.2%. In 2010, per capita real GDP was $28,900 in Mamoogia and $12,700 in Kennan. Assume the growth rate for each country remains the same. Calculate the percentage difference in their levels of potential output in 2050.

A) Kennan’s potential output will be about 32% lower than Mamoogia’s potential output.

B) Kennan’s potential output will be about 76% lower than Mamoogia’s potential output.

C) Kennan’s potential output will be about 32% higher than Mamoogia’s potential output.

D) Kennan’s potential output will be about 76% higher than Mamoogia’s potential output.

Difficulty: Difficult

31. Suppose a country’s real GDP increases. At the same time, its population also increases. What happens to its standard of living?

A) Its standard of living remains the same.

B) Its standard of living depends on the price level.

C) Its standard of living could rise if population growth exceeds output growth.

D) Its standard of living could rise if population growth is smaller than output growth.

Difficulty: Medium

32. Holding all else constant, a country’s standard of living will decline if its

A) nominal GDP grows at a faster rate than real GDP.

B) nominal GDP grows at a slower rate than real GDP.

C) the rate of population growth exceeds the rate of growth of real GDP.

D) the rate of population growth is less than the rate of growth of real GDP.

Difficulty: Medium

33. Holding all else constant, a country’s standard of living will rise if its

A) nominal GDP grows at a faster rate than real GDP.

B) nominal GDP grows at a slower rate than real GDP.

C) rate of population growth exceeds the rate of growth of real GDP.

D) rate of population growth is less than the rate of growth of real GDP.

Difficulty: Medium

34. To assess changes in average standards of living,

A) we examine the difference between the percentage rate of growth of output per capita and the percentage rate of growth of population.

B) we subtract the percentage rate of growth of population from the percentage rate of growth of output per capita to get the percentage rate of growth of output.

C) we subtract the percentage rate of growth of population from the percentage rate of growth of output to get the percentage rate of growth of output per capita.

D) we divide the percentage rate of growth of output by the percentage rate of growth of population to get the percentage rate of growth of output per capita.

Difficulty: Medium

35. Which of the following equations is correct?

A) % growth rate of output per capita % growth rate of output + % growth rate of population

B) % growth rate of output per capita % growth rate of output − % growth rate of population

C) % growth rate of output per capita % growth rate of output × % growth rate of population

D) % growth rate of output per capita % growth rate of output ÷ % growth rate of population

Difficulty: Medium

36. If the rate of growth of output per capita is 8% and the rate of growth of population is 2%, what is the rate of growth of output?

A) 4%

B) 6%

C) 8%

D) 10%

Difficulty: Medium

37. If the rate of growth of output is 8% and the rate of growth of population is 2%, what is the rate of growth of output per capita?

A) 2%

B) 4%

C) 6%

D) 8%

Difficulty: Medium

38. If the rate of growth of output is 10% and the rate of growth of per capita real GDP is 6%, what is the rate of growth of population?

A) 2

B) 4

C) 6

D) 8

Difficulty: Medium

39. If population increases at an average rate of 2% per year and output increases at an average rate of 5% per year, then output per capita will double in

A) 14.4 years.

B) 18 years.

C) 24 years.

D) 36 years.

Difficulty: Difficult

40. If population increases at an average rate of 1% per year and output increases at an average rate of 5% per year, then per capita real GDP will double in

A) 14.4 years.

B) 18 years.

C) 24 years.

D) 36 years.

Difficulty: Medium

41. If output per capita doubles in 24 years and the population doubles in 18 years, what is the growth rate of output?

A) 4% per year

B) 5% per year

C) 6% per year

D) 7% per year

Difficulty: Difficult

42. Suppose the world’s population in 2012 is 7.1 billion and is projected to grow at a rate of 1.2% per year. In approximately what year will the world’s population be 14.2 billion?

A) in the year 2021

B) in the year 2054

C) in the year 2072

D) in the year 3000

Difficulty: Difficult

43. If output per capita doubles in 30 years and the population doubles in 60 years, what is the growth rate of output?

A) 3.6% per year

B) 2.4% per year

C) 2% per year

D) 1.2% per year

Difficulty: Difficult

44. Holding everything else unchanged, if a nation’s output grows at approximately 2.4% per year and its population doubles in 45 years, calculate the approximate rate of change in per capita real GDP.

A) 0.8% per year

B) 1.6% per year

C) 2.4% per year

D) 4% per year

Difficulty: Difficult

45. If a nation’s real GDP grows at approximately 3.4% per year and its population doubles in 120 years, calculate the approximate rate of change in per capita real GDP.

A) 0.6% per year.

B) 2.8% per year.

C) 3.4% per year.

D) 4% per year.

Difficulty: Difficult

46. Suppose a nation’s real GDP grows at approximately 3.6% per year and its per capita real GDP grows by 2.2%. Calculate the approximate rate of population growth.

A) 0.6% per year

B) 1.4% per year

C) −1.4% per year

D) 5.8% per year

Difficulty: Medium

47. Which of the following statements is true?

I. Small differences in rates of economic growth can lead to large differences in levels of potential output over time.

II. From the perspective of the rule of 72, small differences in rates of economic growth between two countries will not significantly affect their respective standards of living.

III. Countries that have higher population growth rates are likely to see higher economic growth rates because increases in population lead to increases in the size of the labor force.

A) I and III

B) II and III

C) I only

D) II only

E) III only

Difficulty: Medium

48. Economic growth can be represented by

A) an increasing equilibrium output level

B) a rightward shift of an economy’s short-run aggregate supply curve.

C) a rightward shift of an economy’s long-run aggregate demand curve.

D) a rightward shift of an economy’s long-run aggregate supply curve.

Difficulty: Medium

Use the following to answer question 49.

Exhibit: Economics Growth and the LRAS Curve

49. (Exhibit: Economics Growth and the LRAS Curve) Exponential economic growth can be depicted by

A) a series of leftward shifts by constant amounts of the LRAS curve.

B) a series of rightward shifts by constant amounts of the LRAS curve.

C) shifts in the LRAS curve to the right in which the successive increases are larger and larger.

D) shifts in the LRAS curve to the left in which the successive decreases are larger and larger.

Difficulty: Medium

50. A curve that relates an economy’s total output to the total amount of labor employed, holding all other determinants of output constant, is called

A) an input-output matrix.

B) an average output function.

C) a marginal product function.

D) an aggregate production function.

Difficulty: Easy

51. The aggregate production function shows the ________ for given levels of labor and other factors of production.

A) real GDP

B) possible combinations of two goods

C) marginal product of labor

D) potential output

Difficulty: Easy

52. Suppose labor is the only variable that changes. If production displays diminishing marginal returns, each additional unit of labor

A) adds more and more to total output.

B) adds less and less to total output.

C) adds a fixed amount to total output.

D) actually decreases output.

Difficulty: Easy

53. Diminishing marginal returns occurs when

A) each additional unit of a variable factor adds less to total output than the previous unit, given constant quantities of other factors.

B) each additional unit of a variable factor adds more to total output than the previous unit, given constant quantities of other factors.

C) each additional unit of a variable factor diminishes total output, given constant quantities of other factors.

D) each additional unit of a variable factor adds a constant amount to total output than the previous unit, given diminishing quantities of other factors.

Difficulty: Easy

54. Consider a firm that produces output using labor and capital. The firm’s stock of capital is fixed and in order to increase output, it must employ more workers. Which of the following occurs as the number of workers increases?

A) Output per worker rises.

B) Capital per worker falls.

C) Wage per worker falls.

D) Total output increases exponentially.

Difficulty: Medium

Use the following to answer questions 55-57.

Exhibit: Aggregate Production Function

55. (Exhibit: Aggregate Production Function) In drawing the aggregate production function, which of the following variables is not held constant?

A) capital

B) labor

C) technology

D) quantity of land

Difficulty: Easy

56. (Exhibit: Aggregate Production Function) The production function displays

A) increasing marginal returns to labor.

B) constant marginal returns to labor.

C) increasing marginal returns to labor initially followed by diminishing marginal returns.

D) diminishing marginal returns to labor.

Difficulty: Medium

57. (Exhibit: Aggregate Production Function) Which of the following could cause the production function to shift upward?

A) an increase in the quantity of labor employed

B) an increase in the economy’s average price level

C) an increase in the availability of natural resources

D) an increase in the real wage rate

Difficulty: Medium

Use the following to answer questions 58-67.

Exhibit: Aggregate Production Function, Labor Market, and LRAS

58. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) The labor market represented in Panel (b) is in long-run equilibrium

A) if it is operating at the natural level of employment.

B) if unemployment rate equals zero.

C) if the macroeconomy is in equilibrium.

D) if there are no diminishing marginal returns.

Difficulty: Medium

59. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) In the labor market represented in Panel (b),

I. the equilibrium real wage equals $40,000.

II. at the equilibrium real wage, 100 million workers are employed.

III. the equilibrium real wage is that which prevails when the economy achieves its natural level of employment.

A) I only

B) I and II only

C) I, II, and III

D) None of the above; to determine if the labor market is in equilibrium, we need information on the economy’s aggregate production function.

Difficulty: Medium

60. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) The real wage is the ratio of

A) the price level to the nominal wage.

B) the nominal wage to the quantity of labor employed.

C) the nominal wage to the price level.

D) real GDP to the nominal wage.

Difficulty: Medium

61. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) The economy could achieve its potential output at a price level-nominal wage combination of

A) 1.5 and $60,000.

B) 1.0 and $50,000.

C) 1.0 and $45,000

D) 0.5 and $30,000.

Difficulty: Difficult

62. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) In the long run, any price level is consistent with a real wage of $40,000 because

A) real wage is perfectly flexible.

B) the labor force is perfectly mobile.

C) nominal wage is perfectly flexible.

D) nominal wage is sticky.

Difficulty: Medium

63. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) In Panel (c), the position of the long-run aggregate supply curve is determined by

A) the economy’s potential output and its aggregate production function.

B) the economy’s potential output and the demand and supply curves for labor.

C) the price level and potential output.

D) the price level and the demand and supply curves for labor.

Difficulty: Medium

64. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) In Panel (c), the long-run aggregate supply curve is vertical because

A) of diminishing marginal returns.

B) of sticky wages and prices.

C) perfectly flexible nominal wages in the long run allow any number of wage/price level combinations to result in a real wage that equilibrates the labor market.

D) the economy is not constrained by diminishing marginal returns since it can change the quantities of all factors of production.

Difficulty: Medium

65. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) If a change in technology moves the aggregate production function upward,

A) the demand for labor will remain the same.

B) the demand for labor falls.

C) the demand for labor increases.

D) the demand and supply of labor will increase.

Difficulty: Medium

66. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) An upward shift of the aggregate production function would lead to

A) a decrease in the real wage and to a decrease in real GDP.

B) an increase in the real wage and to a decrease in real GDP.

C) a decrease in the real wage and to an increase in real GDP.

D) an increase in the real wage and to an increase in real GDP.

Difficulty: Medium

67. (Exhibit: Aggregate Production Function, Labor Market, and LRAS) If a change in technology moves the aggregate production function in Panel (a) upwards, what happens to the economy’s potential output?

A) Potential output remains unchanged.

B) Potential output increases.

C) Potential output decreases.

D) Potential output could increase or decrease depending on what happens in the labor market.

Difficulty: Medium

68. Which of the following statements is true?

A) Technological gains tend to reduce the demand for labor because producers substitute technology and capital for labor.

B) Technological change and capital investment tend to increase real wages because labor productivity increases.

C) Technological change and capital investment tend to reduce the quantity of labor employed, and reduce real wages.

D) Technological change and capital investment tend to reduce the demand for labor and increase the supply of labor leading to an indeterminate effect on real wages.

Difficulty: Medium

69. Which of the following events will shift the long-run aggregate supply curve?

A) a decrease in participation by women in the labor force

B) an increase in the economy’s general price level

C) a liberal immigration policy that welcomes foreign workers

D) a decrease in the average work week from 40 hours to 36 hours

Difficulty: Medium

70. In the U.S., between 1990 and 2007, capital stock and the level of technology increased dramatically. During the same period, employment and real wages rose. What do these set of events suggest?

A) The demand for labor increased by more than the increase in supply of labor over this period.

B) The demand for labor increased by less than the increase in supply of labor over this period.

C) The demand for labor decreased while the supply of labor increased over this period.

D) The demand for labor and the supply of labor decreased over this period.

Difficulty: Medium

Use the following to answer questions 71-75.

Exhibit: Economic Growth, AD and AS Analysis

71. (Exhibit: Economic Growth, AD and AS Analysis) Assume that the economy is initially in long-run equilibrium. What happens if the price of oil, a key input, increases significantly in the economy?

A) The long-run aggregate supply and the short-run aggregate supply curves shift left.

B) The short-run aggregate supply curve shifts left.

C) The aggregate demand and the short-run aggregate supply curves shift left.

D) The long-run aggregate supply, the short-run aggregate supply, and the aggregate demand curves shift left.

Difficulty: Medium

72. (Exhibit: Economic Growth, AD and AS Analysis) Assume that the economy is initially in long-run equilibrium. If oil prices in the economy increased dramatically and remained high for so long that most of the industries in the economy had to significantly form new capital and retool much of its existing capital, the economy would suffer. In this event,

A) the long-run aggregate supply and the short-run aggregate supply curves would shift left, reducing the future industrial capacity and prospects for economic growth.

B) the aggregate demand curve would shift left, reducing the future industrial capacity and prospects for economic growth.

C) only the short-run aggregate supply curve would shift left, permanently reducing the economy’s potential output.

D) the long-run aggregate supply, the short-run aggregate supply, and the aggregate demand curves would shift left, sending the economy into a long recession.

Difficulty: Medium

73. (Exhibit: Economic Growth, AD and AS Analysis) Assume that the economy is initially in long-run equilibrium. What happens if investment spending increases?

A) The short-run aggregate supply curve shifts right and the price level decreases.

B) The long-run aggregate supply curve shifts right and the price level decreases.

C) The long-run aggregate supply curve and the short-run aggregate supply curve shift right and the price level decreases.

D) The aggregate demand curve shifts right and the price level increases.

Difficulty: Medium

74. (Exhibit: Economic Growth, AD and AS Analysis) Assume that the economy is initially in long-run equilibrium. What happens in the long-run if the capital stock in this economy increases over time?

A) The nation’s capacity to produce will increase as represented by a rightward shift of the long-run aggregate supply curve.

B) The nation’s capacity to produce will increase as represented by a rightward shift of the short-run aggregate supply curve. The long-run aggregate supply curve and the aggregate demand curves remain unchanged.

C) The nation’s capacity to produce will increase as represented by a rightward shift of the long-run aggregate demand curve.

D) The nation’s capacity to produce will increase as represented by a rightward shift of the short-run aggregate supply curve and the aggregate demand curve. The long-run aggregate supply curve remains unchanged.

Difficulty: Medium

75. (Exhibit: Economic Growth, AD and AS Analysis) Assume that the economy is initially in long-run equilibrium. Suppose the federal government initiates a tax program that stimulates firms to increase their investment and this leads to economic growth. This policy might, in the short run, result in A) a leftward shift of the aggregate demand and the short-run aggregate supply curve and in the long run, a rightward shift of the long-run aggregate supply curve.

B) a rightward shift of the aggregate demand curve and in the long run, a rightward shift of the long-run aggregate supply and the short-run aggregate supply curves.

C) a rightward shift of the short-run aggregate supply curve and in the long run, a rightward shift of the long-run aggregate supply curve.

D) a leftward shift of the aggregate demand curve and in the long run, a rightward shift of the long-run aggregate supply and the short-run aggregate supply curves.

Difficulty: Medium

76. Which of the following must also shift if the long-run aggregate supply curve shifts?

A) the aggregate production function or the aggregate demand curve

B) the aggregate production function or the labor demand curve

C) the aggregate demand curve and the short-run aggregate supply curve

D) the aggregate demand curve and the labor supply curve

Difficulty: Medium

77. An increase in the capital stock would shift the production function _______ and the long-run aggregate supply curve to the _______.

A) upward; right

B) upward; left

C) downward; left

D) to the right; right

Difficulty: Medium

78. The model of aggregate demand and long-run aggregate supply predicts that, all other things unchanged, improved technology will

A) reduce employment.

B) lower real wages.

C) increase the demand for labor and boost real wages.

D) increase the supply of labor and boost real wages.

Difficulty: Medium

79. The position of the long-run aggregate supply curve is determined by

I. the aggregate production function

II. the labor demand curve

III. the labor supply curve

IV. the prevailing average price level

A) I, II, III, and IV

B) I, II, and III only

C) I and IV only

D) III, III, and IV

Difficulty: Medium

80. Which of the following would shift the production function upward?

A) an increase in the price of oil

B) an increase in the availability of a natural resource

C) a decrease in the supply of labor

D) an increase in the nominal wage rate

Difficulty: Medium

81. Which of the following will not increase the productivity of labor?

A) technological improvements

B) an increase in the capital stock

C) improvements in education

D) an increase in the size of the labor force

Difficulty: Medium

82. Investment in human capital

A) shifts the aggregate production function downward.

B) shifts the LRAS to the left.

C) shifts the aggregate production function upward.

D) decreases the aggregate demand for labor.

Difficulty: Medium

83. Which of the following will not increase labor’s productivity?

A) education

B) technology

C) new capital

D) growth in output

Difficulty: Medium

84. Economic growth occurs when

A) nominal GDP increases.

B) GDP per capita in the short run increases.

C) a nation’s capacity to produce increases.

D) there is a movement along the production possibility curve resulting in increased personal consumption expenditures.

Difficulty: Medium

85. Shifts to the right in the long-run aggregate supply curve are the result of

A) upward shifts in the production function.

B) increases in aggregate demand.

C) decreases in the supply of labor.

D) reductions in the demand for labor.

Difficulty: Medium

86. Economic growth can be achieved through

A) a decrease in the supply of labor.

B) a decrease in the labor force participation rate.

C) an increase in the production of capital goods.

D) a reduction in expenditures on research and development.

Difficulty: Medium

87. During the industrial revolution (the period between the Civil War and World War I), the United States had a massive influx of working age immigrants. What happens in the labor market?

A) The supply of labor curve shifts to the right.

B) The demand for labor curve shifts to the right.

C) The supply of labor and the demand for labor curves shift to the right.

D) There will be an upward movement along the labor supply curve.

Difficulty: Medium

88. Which of the following occurred during the industrial revolution in the United States?

I. More and more firms shifted toward mass production and automation.

II. More and more firms substituted capital investment and technology for labor, leading to a decrease in the demand for labor.

III. Technological change and capital investment displaced workers in some industries, although for the economy as a whole, the demand for labor increased.

A) I only

B) I and II only

C) I and III only

D) II only

E) III only

Difficulty: Medium

89. During the industrial revolution, technological changes, capital investment, and the number of workers employed all increased. What must be true about capital and labor?

A) They are substitute inputs in production.

B) They are complementary inputs in production.

C) They are substitute outputs in production.

D) They are complementary outputs in production.

Difficulty: Medium

90. During the industrial revolution, the United States saw increases in the demand for labor and increases in the supply of labor. The increase in real wages rose during this period is consistent with which of the following statements?

A) The rightward shift in the labor demand curve was greater than the rightward shift of the labor supply curve.

B) The rightward shift in the labor supply curve was greater than the rightward shift of the labor demand curve.

C) The rightward shift in the labor demand curve was greater than the leftward shift of the labor supply curve.

D) The leftward shift in the labor supply curve was greater than the rightward shift of the labor demand curve.

Difficulty: Medium

91. Which of the following factors contribute to economic growth?

A) A decrease in physical capital

B) An increase in the availability of natural resources

C) An increase in the price level

D) A decrease in unemployment

Difficulty: Medium

92. All of the following are sources of economic growth except

A) increases in human capital.

B) an increase in the savings rate.

C) an increase in consumption spending to stimulate production.

D) increases in physical capital.

Difficulty: Medium

93. The determinants of economic growth include all of the following except

A) technological improvement.

B) growth in physical capital.

C) growth in human capital.

D) growth in money supply.

Difficulty: Medium

94. The determinants of economic growth include all of the following except

A) technological improvement.

B) improvements in the quality of factors of production.

C) a stable price level.

D) increases in the quantity of factors of production.

Difficulty: Medium

95. A factor critical to economic growth is

A) increased saving rates.

B) increases in human consumption.

C) reduced dependence on imports.

D) technological change that increases labor productivity.

Difficulty: Medium

96. Economic growth can be modeled as

I. an outward shift of the economy’s production possibilities curve.

II. a rightward shift of the economy’s long-run aggregate supply curve.

III. a rightward shift of the labor demand and the labor supply curves.

IV. a downward shift of the economy’s aggregate production function.

A) I, II, III, and IV

B) I, II, and III only

C) I and II only

D) I, II, and IV only

Difficulty: Medium

97. Which of the following is a cost of economic growth?

A) the sacrifice of current consumption

B) inflation in consumption goods

C) the sacrifice of future consumption

D) excessive depletion of a nation’s human capital

Difficulty: Medium

98. What is the opportunity cost of allocating more and more resources to the production of capital goods?

A) a decrease in real income

B) the amount of consumption goods that could have been produced

C) the increase in pollution

D) the environmental goods foregone

Difficulty: Medium

99. For a given level of technology, a higher rate of economic growth can probably be achieved only if a country’s citizens are prepared to

A) accept lower real wages today in exchange for higher real wages in the future.

B) work longer hours.

C) increase their demand for goods and services.

D) sacrifice some present consumption.

Difficulty: Medium

100. Which of the following events would be most likely to increase an economy’s potential output?

A) a tax increase

B) an increase in transfer payments by the government

C) an improvement in technology

D) an increase in net exports

Difficulty: Medium

101. In the long run, economic growth will lead to

I. the opportunity to produce more consumer goods.

II. the opportunity to produce more capital goods.

III. a higher material standard of living.

IV. a more equitable distribution of income.

A) III and IV only

B) I, II, and III only

C) I, III, and IV only

D) I, II, III, and IV

Difficulty: Medium

102. For economic growth to occur, the citizens of an economy must

A) sacrifice future consumption for current consumption.

B) sacrifice current consumption for future consumption.

C) accept lower real wages today for higher real wages in the future.

D) sacrifice leisure today for leisure in the future.

Difficulty: Medium

103. In the long run, economic growth can be expected to lead to

I. increases in consumption.

II. increases in the capital stock.

III. increases in the savings rate.

IV. outward shifts in the production possibilities curve.

A) I, II, III, and IV

B) I, II, and III only

C) I, II, and IV only

D) I and IV only

Difficulty: Medium

104. All other things unchanged, which of the following events leads to a shift further outward in the country’s production possibility curve?

A) Its labor force participation rate decreases by 5% per year compared to 3% per year.

B) Its saving rate falls from 8% to 1% per year.

C) Government expenditures on basic research increases by 10% per year.

D) The number of students completing college education falls.

Difficulty: Medium

105. Which of the following is an example of an investment in human capital?

A) enrolling in a course to improve your computer skills

B) purchasing a computer to increase the productivity of your workers

C) installing a new piece of software on your computer which enables you to read documents online

D) accepting a job in the computer industry

Difficulty: Medium

106. The skills, training, and education possessed by workers contribute to economic growth

A) by increasing saving.

B) by increasing the quality of labor.

C) by increasing the quantity of labor.

D) by increasing real wages.

Difficulty: Medium

107. Economic growth can generally be achieved through a(n)

A) decrease in economic freedom.

B) decline in the rate of growth in the working-age population.

C) increase in the proportion of GDP used for saving.

D) increase in the depreciation of capital goods.

Difficulty: Medium

108. An increase in saving, all other things unchanged,

A) decreases the amount of resources available for investment.

B) increases the amount of resources that can be devoted to the purchase of capital goods.

C) reduces real GDP by decreasing consumption.

D) increases a country’s present standard of living.

Difficulty: Medium

109. Towards the end of the twentieth century, some of the world’s more affluent countries experienced robust growth while others experienced growth slowdown or even stagnation. Which of the following is not a reason for the divergent growth trend?

A) disparities in the rate of accumulation of human capital

B) unwillingness to enforce property rights

C) disparities in the employment rate

D) differences in macroeconomic policymaking that allow producers to take a long-term view

Difficulty: Medium

110. Towards the end of the twentieth century, some of the world’s more affluent countries experienced robust growth. Which of the following is not linked to high growth performance?

A) encouragement of competitive behavior
B) private sector research and development

C) strict regulations in labor markets

D) liberal trade policies

Difficulty: Medium

111. The 2015 Going for Growth study suggested that:

A) reform efforts have been substantial enough in most countries to complete eliminate priority areas completely.

B) reform efforts have been the same across priority areas.

C) reform efforts have been stronger in some priority areas than in others.

D) the Going for Growth agenda is no longer important because economic growth per capita has improved in most countries

Difficulty: Medium

True/False

1. Economic growth is best viewed as short-run changes in nominal GDP.

2. Exponential growth means the growth rate increases over time.

3. If real GDP grows at 3% and population grows at 1.2%, then real GDP per capita grows by 4.2%.

4. Economic growth can be illustrated by an outward shift of the production possibilities curve.

5. Economic growth is the process through which the economy’s potential output is increased.

6. Economic growth is defined in terms of changes in the economy’s level of goods and services produced from one period to the next.

7. Real GDP tends to fluctuate around potential output.

8. According to the rule of 72, a 12% annual increase in real GDP would lead to a doubling of real GDP in 8 years.

9. If an economy grows at a constant rate of 1.5% per year, it will not experience exponential growth.

10. The real wage is the ratio of the price level to the nominal wage.

11. The position of the long-run aggregate supply curve is determined by the aggregate production function and the demand and supply curves for labor.

12. A shift in the production function will shift the long-run aggregate supply curve.

13. A change in the supply of labor will shift the long-run aggregate supply curve.

14. An increase in technology will shift the long-run aggregate supply curve to the left.

15. Economic growth is represented by an outward shift of the production possibilities curve.

16. If the production possibilities curve shifts outward, the long-run aggregate supply curve will shift rightward.

17. For economic growth to take place, we must consume more and save less.

18. All other things unchanged, higher saving rates contribute to higher rates of capital formation.

19. Increases in human capital will promote economic growth.

20. A change in the availability of natural resources will shift the aggregate production function.

Short Answer

1. Define economic growth. Why is it described as a process rather than an event?

2. Identify four factors that contribute to economic growth and explain how each factor affects economic growth.

3. Why is the long-run aggregate supply curve vertical? Explain the factors that determine the position of the long-run aggregate supply curve.

4. Using a three-panel diagram of the labor market, the aggregate production function, and long-run aggregate supply, show and explain the effect of an increase in capital stock on wages, employment, and potential output.

5. Using a three-panel diagram of the labor market, the aggregate production function, and long-run aggregate supply, show and explain the effect of a decrease in the labor supply on wages, employment, and potential output.