Economics 11th Edition Michael Parkin Test Bank 1
Economics 11th Edition Michael Parkin Test Bank 1
Economics 11th Edition Michael Parkin Test Bank 1
2
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4) If a nation's population grows, then,
A) growth in real GDP per person will be less than the growth of real GDP.
B) there can be no economic growth.
C) growth in real GDP per person will be greater than the growth of real GDP.
D) there must be an increase in real GDP per person.
Answer: A
Topic: Long-Term Growth Trends
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
5) In 2011, Armenia had a real GDP of $4.21 billion and a population of 2.98 million. In 2012,
real GDP was $4.59 billion and population was 2.97 million. What was Armenia's economic
growth rate from 2011 to 2012?
A) 0.38 percent
B) 9.0 percent
C) 3.8 percent
D) 8.3 percent
Answer: B
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
6) In 2011, Armenia had a real GDP of approximately $4.21 billion and a population of 2.98
million. In 2012, real GDP was $4.59 billion and population was 2.97 million. From 2011 to
2012, Armenia's standard of living ________.
A) increased
B) decreased
C) did not change
D) might have increased, decreased, or remained unchanged but more information is needed to
determine which.
Answer: A
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
3
Copyright © 2014 Pearson Education, Inc.
7) In 2011, Armenia had a real GDP of approximately $4.21 billion and a population of 2.98
million. In 2012, real GDP was $4.59 billion and population was 2.97 million. Armenia's real
GDP per person in 2012 was
A) $1,545
B) $380
C) $1,413
D) $132
Answer: A
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
8) During 2014, the country of Economia had a real GDP of $115 billion and the population was
0.9 billion. In 2013, real GDP was 105 billion and the population was 0.85 billion. In 2014, real
GDP per person was
A) $128
B) $124
C) $135
D) $117
Answer: A
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
9) During 2014, the country of Economia had a real GDP of $115 billion and the population was
0.9 billion. In 2013, real GDP was 105 billion and the population was 0.85 billion. In 2013, real
GDP per person was
A) $128
B) $124
C) $135
D) $117
Answer: B
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
4
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10) Suppose real GDP for a country is $13 trillion in 2010, $14 trillion in 2011, $15 trillion in
2012, and $16 trillion in 2013. Over this time period, the real GDP growth rate is
A) increasing.
B) decreasing.
C) constant.
D) negative.
Answer: B
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
11) Suppose that in 2013 a country has a population of 1 million and real GDP of $1 billion. In
2014, the population is 1.1 million and the real GDP is $1.1 billion. The real GDP per person
growth rate is
A) $1000.
B) positive.
C) negative.
D) zero.
Answer: D
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
12) During 2013, the country of Economia had a real GDP of $115 billion and the population
was 0.9 billion. In 2012, real GDP was 105 billion and the population was 0.85 billion.
Economia's growth rate of real GDP per person is
A) 3.23 percent
B) 5 percent
C) 5.88 percent
D) 9.52 percent
Answer: A
Topic: Economic Growth Rate
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
5
Copyright © 2014 Pearson Education, Inc.
13) Suppose a nation's population grows by 2 percent and, at the same time, its GDP grows by 5
percent. Approximately how fast will real GDP per person increase?
A) 3 percent per year
B) 2 percent per year
C) 5 percent per year
D) 10 percent per year
Answer: A
Topic: Economic Growth Rate
Skill: Analytical
Status: Old
AACSB: Analytical Skills
15) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP
growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels
the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP
since 1997. Which of the following is true?
A) India's PPF has been shifting rightward since 1997.
B) India's PPF has been shifting leftward since 1997.
C) India has been moving from a point within its PPF to points beyond its PPF.
D) India's PPF has not shifted since 1997.
Answer: A
Topic: Growth vs. Cyclical Expansion
Skill: Analytical
Status: New
AACSB: Analytical Skills
6
Copyright © 2014 Pearson Education, Inc.
16) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP
growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels
the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP
since 1997. Based on this story, it is most likely that the slowdown reflects a
A) temporary business cycle slowdown.
B) temporary business cycle expansion.
C) change to India's long-term economic growth rate.
D) shrinkage of India's economy.
Answer: A
Topic: Growth vs. Cyclical Expansion
Skill: Analytical
Status: New
AACSB: Analytical Skills
18) Using the Rule of 70, if China's current growth rate of real GDP per person was 7 percent a
year, how long would it take the country's real GDP per person to double?
A) 35 years
B) 14 years
C) 10 years
D) 49 years
Answer: C
Topic: Rule of 70
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
7
Copyright © 2014 Pearson Education, Inc.
19) Using the Rule of 70, if the country of Huttodom's current growth rate of real GDP per
person was 10 percent a year, how long would it take the country's real GDP per person to
double?
A) 0.7 years
B) 20 years
C) 7 years
D) 10 years
Answer: C
Topic: Rule of 70
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
20) Slowdonia's current growth rate of real GDP per person is 2 percent a year. How long will it
take to double real GDP per person?
A) half a year
B) approximately 10 years
C) 28.6 years
D) 35 years
Answer: D
Topic: Rule of 70
Skill: Analytical
Status: Old
AACSB: Analytical Skills
21) Slowdonia's current growth rate of real GDP per person is 1 percent a year. Approximately
how long will it take to double real GDP per person?
A) 10 years
B) 35 years
C) 70 years
D) 100 years
Answer: C
Topic: Rule of 70
Skill: Analytical
Status: Old
AACSB: Analytical Skills
8
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22) If real GDP per person is growing at 4 percent per year, approximately how many years will
it take to double?
A) 17.5
B) 25
C) 4
D) 8
Answer: A
Topic: Rule of 70
Skill: Analytical
Status: Old
AACSB: Analytical Skills
23) Suppose a country is producing $20 million of real GDP. If the economy grows at 10
percent per year, approximately how many years will to take for real GDP to grow to $80
million?
A) 14
B) 7
C) 4
D) 30
Answer: A
Topic: Rule of 70
Skill: Analytical
Status: Old
AACSB: Analytical Skills
24) Real GDP per person in the country of Flip is $10,000, and the growth rate is 10 percent a
year. Real GDP per person in the country of Flap is $20,000 and the growth rate is 5 percent a
year. When will real GDP per person be greater in Flip than in Flap?
A) in 2 years
B) in 15 years
C) never
D) in 10 years
Answer: B
Topic: Rule of 70
Skill: Analytical
Status: Old
AACSB: Analytical Skills
9
Copyright © 2014 Pearson Education, Inc.
25) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP
growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels
the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP
since 1997. Which of the following is true?
A) India's PPF has been shifting rightward since 1997.
B) India's PPF has been shifting leftward since 1997.
C) India has been moving from a point within its PPF to points beyond its PPF.
D) India's PPF has not shifted since 1997.
Answer: A
Topic: Growth vs. Cyclical Expansion
Skill: Analytical
Status: New
AACSB: Analytical Skills
26) According to the Economic Times (09/2012), Standard & Poor's forecast for India's GDP
growth rate was cut by 1 percentage point to 5.5 percent as the entire Asia Pacific region feels
the pressure of ongoing economic uncertainty. India has averaged 7 percent growth in GDP
since 1997. Based on this story, it is most likely that the slowdown reflects a
A) temporary business cycle slowdown.
B) temporary business cycle expansion.
C) change to India's long-term economic growth rate.
D) shrinkage of India's economy.
Answer: A
Topic: Growth vs. Cyclical Expansion
Skill: Analytical
Status: New
AACSB: Analytical Skills
10
Copyright © 2014 Pearson Education, Inc.
2 Long-Term Growth Trends
1) Over the last 100 years, the average U.S. growth rate in real GDP per person was about
A) 2 percent per year.
B) 6 percent per year.
C) 12.5 percent per year.
D) 1 percent per year.
Answer: A
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
2) Over the past 100 years, real GDP per person in the United States has grown at an average of
________ percent a year.
A) 1
B) 2
C) 3
D) 4
Answer: B
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
3) The growth rate of real GDP per person in the United States has
A) averaged approximately 2 percent per year over the past century.
B) has consistently been 2 percent per decade over the past century.
C) has been the highest in the world over the past 5 decades.
D) has increased every year over the past century.
Answer: A
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
4) Over the past 100 years real GDP per person in the United States, on average, has
A) decreased by about 5 percent per year.
B) increased by about 2 percent per year.
C) increased by about 5 percent per year.
D) increased by about 10 percent per year.
Answer: B
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
11
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5) Over the past 100 years, in the United States the average growth rate of ________ grew at a
faster rate than ________.
A) real GDP; nominal GDP
B) the population; real GDP
C) real GDP; the population
D) inflation; real GDP
Answer: C
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
7) The historical record for the United States for the past 100 years shows
A) growth in real GDP per person during most years.
B) economic growth for about half the years and economic decline for the other half.
C) growth until 1970 and then a period of constant per person real GDP.
D) continuous economic growth, although at different rates, throughout the entire century.
Answer: A
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
8) Which of following was a period of below-average economic growth in the United States?
A) the 1920s
B) the 1960s
C) the 1930s
D) all of the above
Answer: C
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
12
Copyright © 2014 Pearson Education, Inc.
9) Which of the following statements are correct?
I. The average economic growth rate in real GDP per person in the United States over the last
century was 5 percent per year.
II. The United States has the highest economic growth rate of any nation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: D
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
10) The historical record for the United States over the last 100 years shows
A) mostly positive economic growth, though the Great Depression caused actual GDP to dip
well below potential GDP.
B) economic growth for about half the years and economic decline for the other half.
C) growth until 1970 and then a period of constant per person real GDP.
D) continuous economic growth for each year, although at different rates, throughout the entire
century.
Answer: A
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
11) Which of the following statements regarding U.S. economic growth is NOT correct?
A) Over the past 100 years, on the average real GDP per person grew 2 percent a year.
B) The average annual growth rate of real GDP per person in the United States was rapid during
World War II.
C) In the 1930s, real GDP fell well below its trend.
D) The growth rate of real GDP per person accelerated between 1973 to 1984.
Answer: D
Topic: Long-Term Economic Growth in the United States
Skill: Analytical
Status: Old
AACSB: Analytical Skills
13
Copyright © 2014 Pearson Education, Inc.
12) In 2010, of the following which nations had the highest level of real GDP per person?
A) Japan
B) Europe Big 4
C) Canada
D) China
Answer: C
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
13) In 2012, of the following ________ had the highest real GDP per person.
A) Japan
B) Canada
C) the Europe Big 4 countries
D) the United States
Answer: D
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
14) During the last 50 years, which of the following had the lowest level of real GDP per person?
A) Africa
B) Central and South America
C) United States
D) Central Europe
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
15) During the 1990s, which of the following experienced the slowest rate of growth in real GDP
per person?
A) Japan
B) The big 4 nations of Europe
C) United States
D) Canada
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
14
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16) Countries or regions in which real GDP per person has not grown as fast as in the United
States since 1960 include
A) Japan.
B) countries in Africa.
C) Hong Kong.
D) Canada.
Answer: B
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
17) Which of the following statements about world growth during the last half of the 20th
century is correct?
A) In every decade, Japan has experienced faster growth than the United States.
B) Growth rates in South American countries have exceeded those in North America.
C) Real GDP per person in Hong Kong and Singapore are approaching or surpassing that in the
United States.
D) Due to rapid growth, real GDP per person in China is now about 50 percent of that in the
United States.
Answer: C
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
18) Since 1960, which of the following countries had average growth rates in real GDP per
person higher than that of the United States?
A) Singapore
B) Hong Kong
C) South Korea
D) All of the above answers are correct.
Answer: D
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
15
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19) Of the following Asian countries, which has the lowest level of real GDP per person?
A) China
B) Korea
C) Singapore
D) Hong Kong
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
20) The gap between real GDP per person in Africa and real GDP per person in the United States
has been
A) increasing.
B) decreasing.
C) remaining fairly constant.
D) there is no gap in real GDP per person between Africa and the United States.
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
21) Over the past fifty years, there has been substantial closure of the gap in real GDP per person
between which of the following groups of countries?
A) the United States and Central and South America
B) Africa and Western Europe
C) Central and South America and Africa
D) the United States and Japan
Answer: D
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
22) Between which pair of countries or continents listed below has real GDP per person
converged the most since 1960?
A) Canada and Japan
B) United States and Africa
C) United States and South America
D) Canada and South America
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
16
Copyright © 2014 Pearson Education, Inc.
23) If a rich country grows at a faster rate than a poor one, then
A) the gap in their standard of living will widen over time.
B) the gap in their standard of living will close over time.
C) the difference in their living standards will not change over time.
D) whether or not the living standards gap widens or closes over time depends on the absolute
size of the relative growth rates.
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
24) Convergence of the income gap has been most dramatic between
A) Hong Kong and the United States.
B) the Central European countries and the United States.
C) Africa and the United States.
D) South America and the United States.
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
25) The gaps between the United States and the Asian countries of Honk Kong, Singapore,
Korea and China have been
A) decreasing
B) increasing
C) remaining fairly constant
D) there are no gaps between these Asian countries and the United States
Answer: A
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
26) By measuring ________ we can see that the economies of Hong Kong and Singapore are
catching up to the economies of North America but that the economies of Central and South
America are not.
A) inflation per person
B) real GDP per person
C) the population
D) real GDP
Answer: B
Topic: Real GDP Growth in the World Economy
Skill: Analytical
Status: Old
AACSB: Analytical Skills
17
Copyright © 2014 Pearson Education, Inc.
3 How Potential GDP Grows
1) Moving along the aggregate production function shows the relationship between ________,
holding all else constant.
A) capital input and real GDP
B) labor input and real GDP
C) labor input, capital input and real GDP
D) technology and real GDP
Answer: B
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
2) The aggregate production function shows how ________ varies with ________.
A) leisure time; labor
B) labor; leisure time
C) real GDP; labor
D) labor; capital
Answer: C
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
18
Copyright © 2014 Pearson Education, Inc.
5) A movement along the aggregate production function is the result of a change in
A) the quantity of labor
B) technology
C) capital
D) interest rates
Answer: A
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
6) Along the aggregate production function, as the quantity of labor rises, real GDP
A) rises
B) falls
C) stays the same
D) may fall, rise, or stay the same
Answer: A
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
7) The aggregate production function shows that an economy increases its real GDP in the short
run by
A) developing new technologies.
B) increasing its physical capital stock.
C) using more labor.
D) exploring for new deposits of natural resources.
Answer: C
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
8) Moving along the aggregate production function, all of the following are held constant
EXCEPT
A) labor
B) capital
C) human capital
D) technology
Answer: A
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
19
Copyright © 2014 Pearson Education, Inc.
9) An increase in labor hours will lead to
A) a shift of the aggregate production function but no movement along it.
B) a movement along the aggregate production function but no shift in it.
C) both a movement along and a shift in the aggregate production function.
D) neither a movement along nor a shift in the aggregate production function.
Answer: B
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
12) The aggregate production function relating real GDP to labor hours
A) has a constant slope.
B) has a negative slope.
C) has a positive slope and becomes steeper as employment increases.
D) has a positive slope and becomes less steep as employment increases.
Answer: D
Topic: Aggregate Production Function, Diminishing Returns
Skill: Graphing
Status: Old
AACSB: Analytical Skills
20
Copyright © 2014 Pearson Education, Inc.
13) The curvature of the production function shows that as employment increases, the
productivity of labor
A) remains positive and increases.
B) remains positive but decreases.
C) decreases and becomes negative.
D) remains constant.
Answer: B
Topic: Aggregate Production Function, Diminishing Returns
Skill: Graphing
Status: Old
AACSB: Analytical Skills
21
Copyright © 2014 Pearson Education, Inc.
17) In the illustration above, which figure shows an aggregate production function?
A) Figure A
B) Figure B
C) Figure C
D) Figure D
Answer: A
Topic: Aggregate Production Function
Skill: Graphing
Status: Old
AACSB: Analytical Skills
22
Copyright © 2014 Pearson Education, Inc.
18) The country of Kemper is on its aggregate production function at point W in the above
figure. The government of Kemper passes a law that makes 4 years of college mandatory for all
citizens. After all citizens have their education, the economy will
A) move to point such as Y.
B) remain at point W.
C) move to point such as X.
D) move to point such as Z.
Answer: D
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
19) The country of Kemper is on its aggregate production function at point W in the above
figure. If the population increases with no change in capital or technology, the economy will
A) move to point such as Y.
B) remain at point W.
C) move to point such as X.
D) move to point such as Z.
Answer: C
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
23
Copyright © 2014 Pearson Education, Inc.
20) The real wage rate measures the
A) quantity of goods and services that an hour of work will buy.
B) average weekly earnings in dollars of a worker.
C) dollar value of an hour of work.
D) dollar value of what a worker could earn in another job.
Answer: A
Topic: Real Wage Rate
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
21) Which of the following is TRUE regarding the real wage rate? The real wage rate
I. is always greater than the money wage.
II. measures the quantity of goods and services an hour's work can buy.
A) only I
B) only II
C) both I and II
D) neither I nor II
Answer: B
Topic: Real Wage Rate
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
23) The relationship between the labor employed by a firm and the real wage rate is shown by
the
A) supply of labor curve.
B) supply of jobs curve.
C) demand for jobs curve.
D) demand for labor curve.
Answer: D
Topic: Demand for Labor
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
24
Copyright © 2014 Pearson Education, Inc.
24) The quantity of labor demanded depends on the
A) money wage rate not the real wage rate.
B) real wage rate not the money wage rate.
C) price of output not the money wage rate nor the real wage rate.
D) money wage rate AND the real wage rate.
Answer: B
Topic: Demand for Labor
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
25) Because the productivity of labor decreases as the quantity of labor employed increases,
A) the quantity of labor a firm demands increases as the real wage rate decreases.
B) the quantity of labor a firm demands increases as the money wage rate decreases.
C) the labor demand curve shifts right as the real wage rate decreases.
D) the aggregate production function shifts upward as the real wage rate decreases.
Answer: A
Topic: Demand for Labor
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
25
Copyright © 2014 Pearson Education, Inc.
27) Which of the following statements are TRUE regarding the demand for labor?
I. The quantity of labor demanded depends on the real wage rate.
II. If the money wage rate increases and the price level remains the same, the quantity of labor
demanded decreases.
A) I only
B) II only
C) I and II
D) neither I nor II
Answer: C
Topic: Demand for Labor
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
28) If the price level falls by 5 percent and workers' money wage rates remain constant, firms'
A) quantity of labor demanded will decrease.
B) quantity of labor demanded will increase.
C) supply of jobs will increase.
D) None of the above answers are correct.
Answer: A
Topic: Demand for Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
29) If the price level rises by 5 percent and workers' money wage rates remain constant, firms'
A) quantity of labor demanded will decrease.
B) quantity of labor demanded will increase.
C) supply of jobs will decrease.
D) None of the above answers are correct.
Answer: B
Topic: Demand for Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
30) Suppose there is a rise in the price level, but no change in the money wage rate. As a result,
the quantity of labor demanded
A) increases.
B) decreases.
C) does not change because there is no change in the real wage rate.
D) decreases only if the money wage rate also decreases.
Answer: A
Topic: Demand for Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
26
Copyright © 2014 Pearson Education, Inc.
31) Suppose there is a rise in the real wage rate. As a result, the quantity of labor demanded
A) increases.
B) decreases.
C) does not change because there is no change in the money wage rate.
D) increases only if the price level also decreases.
Answer: B
Topic: Demand for Labor
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
32) Suppose the money wage rate and the price level both fall by 5 percent. As a result,
A) the quantity of labor demanded increases.
B) the quantity of labor demanded decreases.
C) the quantity of labor demanded does not change because there is no change in the real wage.
D) people are worse off and there is more unemployment.
Answer: C
Topic: Demand for Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
33) If the price level rises by 3 percent and workers' money wage rates increase by 2 percent,
then the
A) quantity of labor demanded will decrease.
B) quantity of labor demanded will increase.
C) quantity of labor demanded does not change because there is no change in the real wage rate.
D) real wage rate increases.
Answer: B
Topic: Demand for Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
34) If the price level rises by 3 percent and workers' money wages increase by 3 percent, then the
A) quantity of labor demand will decrease.
B) quantity of labor demand will increase.
C) quantity of labor demanded does not change because there is no change in the real wage rate.
D) Any of the above could occur depending on the magnitude on the dollar increase in the price
level versus the dollar increase in the wage rate.
Answer: C
Topic: Demand for Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
27
Copyright © 2014 Pearson Education, Inc.
35) The demand for labor curve is
A) upward sloping at potential GDP and downward sloping elsewhere.
B) vertical at potential GDP.
C) downward sloping.
D) upward sloping because firms demand labor.
Answer: C
Topic: Demand for Labor Curve
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
37) If the price level increases, but workers' money wage rates remain constant, which of the
following is TRUE?
I. The quantity of labor demanded will increase.
II. The real wage rate will decrease.
III. The demand for labor curve shifts rightward.
A) I only
B) I and II
C) II and III
D) I, II and III
Answer: B
Topic: Demand for Labor Curve
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
40) If workers' money wage rates increase by 5 percent and the price level remains constant,
workers'
A) quantity of labor supplied will decrease.
B) quantity of labor supplied will increase.
C) quantity of labor supplied will not change.
D) demand for jobs will decrease.
Answer: B
Topic: Supply of Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
41) If the price level rises by 4 percent and workers' money wage rates increase by 2 percent,
then the
A) quantity of labor supplied decreases.
B) quantity of labor supplied increases.
C) quantity of labor supplied does not change because there is no change in the real wage rate.
D) the supply curve of labor shifts rightward.
Answer: A
Topic: Supply of Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
42) If the price level rises by 2 percent and workers' money wages increase by 2 percent, then the
A) quantity of labor supply decreases.
B) quantity of labor supply increases.
C) quantity of labor supplied does not change because there is no change in the real wage rate.
D) More information about the dollar change in the price level and money wage rate are needed
to answer the question.
Answer: C
Topic: Supply of Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
29
Copyright © 2014 Pearson Education, Inc.
43) If the price level rises by 3 percent and workers' money wage rate increase by 1 percent, then
the
A) quantity of labor supplied decreases.
B) quantity of labor supplied increases.
C) quantity of labor supplied does not change because there is no change in the real wage rate.
D) real wage rate increases.
Answer: A
Topic: Supply of Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
30
Copyright © 2014 Pearson Education, Inc.
47) Which of the following statements is correct?
A) When the real wage increases, the labor supply curve shifts rightward.
B) When the real wage increases, the labor supply curve shifts leftward.
C) When the real wage decreases, the labor supply curve shifts leftward.
D) None of the above statements are correct.
Answer: D
Topic: Supply of Labor Curve
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
49) If the price level increases and workers' money wage rates remain constant, which of the
following will occur?
I. The quantity of labor supplied will decrease.
II. The real wage rate will decrease.
III. The labor supply curve will shift rightward.
A) I only
B) I and II
C) II and III
D) I, II and III
Answer: B
Topic: Supply of Labor Curve
Skill: Analytical
Status: Old
AACSB: Analytical Skills
50) Greater labor force participation for households at higher real wage rate is one reason that
A) the demand for labor curve is upward sloping.
B) the demand for labor curve is downward sloping.
C) the supply of labor curve is upward sloping.
D) the supply of labor curve is downward sloping.
Answer: C
Topic: Supply of Labor Curve
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
31
Copyright © 2014 Pearson Education, Inc.
51) If the money wage rate rises relative to the price level, firms ________ the quantity of labor
they demand and workers ________ the quantity of labor they supply.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
Topic: Demand for Labor and Supply of Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
52) If the price level rises relative to the money wage rate, firms ________ the quantity of labor
they demand and workers ________ the quantity of labor they supply.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: B
Topic: Demand for Labor and Supply of Labor
Skill: Analytical
Status: Old
AACSB: Analytical Skills
53) If the real wage rate is such that the quantity of labor supplied equals the quantity of labor
demanded,
A) a full-employment equilibrium occurs.
B) actual GDP equals potential GDP.
C) the supply curve of labor is vertical.
D) Both answers A and B are correct.
Answer: D
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
32
Copyright © 2014 Pearson Education, Inc.
54) If at the prevailing real wage rate, the quantity of labor supplied exceeds the quantity
demanded,
A) there is a shortage of labor.
B) the real wage rate will rise to restore equilibrium.
C) the real wage rate is greater than the equilibrium real wage rate.
D) None of the above answers is correct.
Answer: C
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
55) If the real wage rate is such that the quantity of labor supplied is greater than the quantity of
labor demanded,
A) the economy is at full employment.
B) actual real GDP will not equal potential GDP.
C) job search decreases.
D) labor resources are allocated efficiently.
Answer: B
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
56) If the real wage rate is such that the quantity of labor supplied by workers is less than the
quantity of labor demanded by firms,
A) the economy is at full employment.
B) there is a shortage of labor.
C) the real wage rate will fall to restore equilibrium.
D) actual real GDP equals potential GDP because firms make the decision about how many
workers to hire.
Answer: B
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
59) When the quantity of labor demanded exceeds the quantity of labor supplied, the real wage
rate
A) rises to eliminate the labor-market shortage.
B) falls to eliminate the labor-market surplus.
C) rises to eliminate the labor-market surplus.
D) falls to eliminate the labor-market shortage.
Answer: A
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
60) If the labor market is in equilibrium and then the labor supply curve shifts rightward,
A) there will be a shortage of labor at the original equilibrium wage rate.
B) there will be a surplus of labor at the original equilibrium wage rate.
C) the equilibrium wage rate will rise.
D) there will be a surplus of jobs at the new equilibrium.
Answer: B
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
61) In the labor market, an increase in labor productivity ________ the real wage rate and
________ the level of employment.
A) raises; increases
B) raises; decreases
C) lowers; increases
D) lowers; decreases
Answer: A
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
34
Copyright © 2014 Pearson Education, Inc.
Quantity of labor
Real wage rate Quantity of labor
demanded
(2005 dollars supplied (billions
(billions of hours
per hour) of hours per year)
per year)
15 70 10
20 60 20
25 50 30
30 40 40
35 30 50
62) The table above shows the labor market for the country of Pickett. When the labor market is
in equilibrium, the real wage rate is ________ and ________ of labor a year are employed.
A) any value less than $25 an hour; any value greater than 40 billion hours
B) any value greater than $30 an hour; any value more than 40 billion hours
C) any value greater than or equal to $25 an hour; any value less than 40 billion hours
D) $30 an hour; 40 billion hours
Answer: D
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
35
Copyright © 2014 Pearson Education, Inc.
63) In the above figure, at the real wage rate of $50
A) there is a surplus of 100 billion hours per year.
B) there is a shortage of 100 billion hours per year.
C) there is a surplus of 60 billion hours per year.
D) there is shortage of 20 billion hours per year.
Answer: C
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
64) In the above figure, what is the full-employment real wage rate and quantity of hours per
year?
A) $40 and 60 billion hours per year
B) $50 and 100 billion hours per year
C) $35 and 100 billion hours per year
D) $50 and 40 billion hours per year
Answer: A
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
36
Copyright © 2014 Pearson Education, Inc.
65) In the above figure, at a wage rate of $20 per hour,
A) there is a shortage of labor.
B) there is a surplus of labor.
C) the labor supply curve will shift rightward.
D) the labor demand curve will shift rightward.
Answer: B
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
66) In the figure, when the real wage rate is $10 an hour, ________.
A) a shortage of labor exists and the real wage rate will rise
B) the demand for labor will increase
C) the demand for labor will decrease
D) a surplus of labor exists and the real wage rate will fall
Answer: A
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
37
Copyright © 2014 Pearson Education, Inc.
67) In the above figure, the equilibrium real wage rate is
A) $10 per hour.
B) $15 per hour.
C) $20 per hour.
D) none of the above
Answer: B
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
69) In the above figure, if the real wage is $20 per hour, a labor
A) shortage will occur and the real wage will rise.
B) shortage will occur and the real wage will fall.
C) surplus will occur and the real wage will rise.
D) surplus will occur and the real wage will fall.
Answer: D
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
70) In the above figure, if the real wage is $10 per hour, a labor
A) shortage will occur and the real wage will rise.
B) shortage will occur and the real wage will fall.
C) surplus will occur and the real wage will rise.
D) surplus will occur and the real wage will fall.
Answer: A
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
38
Copyright © 2014 Pearson Education, Inc.
71) Full employment corresponds to
A) equilibrium in the labor market, with actual GDP being equal to potential GDP.
B) labor demand being greater than labor supply and actual GDP being equal to potential GDP.
C) being at the point where the marginal product of labor equals zero.
D) equilibrium in the labor market, and actual GDP exceeding potential GDP.
Answer: A
Topic: The Labor Market and Full Employment
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
Quantity of labor
Real wage rate Quantity of labor
demanded
(2005 dollars supplied (billions
(billions of hours
per hour) of hours per year)
per year)
15 70 10
20 60 20
25 50 30
30 40 40
35 30 50
72) The tables above show the labor market and the production function schedule for the country
of Pickett. Potential GDP is ________.
A) $40 trillion
B) $9 trillion
C) $14 trillion
D) $25 trillion
Answer: C
Topic: Labor Market and Full Employment
Skill: Analytical
Status: Revised
AACSB: Analytical Skills
39
Copyright © 2014 Pearson Education, Inc.
73) The tables above show the labor market and the production function schedule for the country
of Pickett. An increase in population changes the labor supply by 20 billion hours at each real
wage rate. Potential GDP ________.
A) does not change
B) decreases to $3 trillion
C) increases to $50 trillion
D) increases to $18 trillion
Answer: D
Topic: Labor Market and Full Employment
Skill: Analytical
Status: Old
AACSB: Analytical Skills
75) If the labor and capital grow more quickly, then real GDP will
A) not grow fast enough.
B) grow more quickly.
C) grow more slowly.
D) stay fixed at potential GDP.
Answer: B
Topic: Economic Growth Rate
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
40
Copyright © 2014 Pearson Education, Inc.
76) The real wage rate will fall if the
A) labor supply curve shifts rightward and the labor demand curve does not shift.
B) labor supply curve shifts leftward and the labor demand curve does not shift.
C) labor demand curve shifts rightward and the labor supply curve does not shift.
D) labor demand curve shifts rightward more than the labor supply curve shifts rightward.
Answer: A
Topic: Labor Market Equilibrium with an Increase in Population
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
77) The U.S. employment-to-population ratio peaked in 2000 and in 2012 fell to 58 percent, a
level not seen since the early 1980s. This fall in the employment-to-population ratio shifts the
________ curve ________.
A) labor supply; leftward
B) labor supply; rightward
C) labor demand; leftward
D) labor demand; rightward
Answer: B
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: New
AACSB: Analytical Skills
78) The U.S. employment-to-population ratio peaked in 2000 and in 2012 fell to 58 percent, a
level not seen since the early 1980s. This fall in the employment-to-population ratio ________
the equilibrium quantity of labor and ________ potential GDP.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: D
Topic: Labor Market Equilibrium
Skill: Conceptual
Status: New
AACSB: Analytical Skills
81) An increase in the population and hence the supply of labor causes a
A) shortage of labor at the original real wage rate and the real wage rate will fall.
B) surplus of labor at the original real wage rate and the real wage rate will rise.
C) surplus of labor at the original real wage rate and the real wage rate will fall.
D) shortage of labor at the original real wage rate and the real wage rate will rise.
Answer: C
Topic: Labor Market Equilibrium with an Increase in Population
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
83) When the population increases with no change in labor productivity, employment ________
and potential GDP ________.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases
Answer: B
Topic: Labor Market Equilibrium with an Increase in Population
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
42
Copyright © 2014 Pearson Education, Inc.
84) If the population increases, then potential GDP ________ and employment ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Topic: Labor Market Equilibrium with an Increase in Population
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
87) Labor growth depends mainly on ________ and labor productivity growth depends mainly
on ________.
A) population growth; increases in real GDP
B) population growth; technological advances
C) growth in real GDP per person; growth rate of capital
D) growth in real GDP per person; technological advances
Answer: B
Topic: Labor Productivity
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
43
Copyright © 2014 Pearson Education, Inc.
88) Labor productivity is
A) real GDP per hour of labor times the hours of work.
B) real GDP per hour of labor times the number of people.
C) real GDP per hour of labor.
D) the rate of change in real GDP per hour of labor.
Answer: C
Topic: Labor Productivity
Skill: Definition
Status: Old
AACSB: Analytical Skills
89) Dividing the value of real GDP by aggregate labor hours gives
A) the net domestic product.
B) labor productivity.
C) the size of the labor force.
D) the rate of capital accumulation.
Answer: B
Topic: Labor Productivity
Skill: Definition
Status: Old
AACSB: Analytical Skills
44
Copyright © 2014 Pearson Education, Inc.
92) If real GDP is $800 million and aggregate labor hours are 20 million, labor productivity is
________.
A) $40 per hour
B) $16,000 million
C) $40 million
D) $160 per hour
Answer: A
Topic: Labor Productivity
Skill: Analytical
Status: Old
AACSB: Analytical Skills
93) If real GDP is $13,000 billion and aggregate hours are 270 billion, labor productivity equals
A) $6.50 per hour.
B) $45 per hour.
C) $48 per hour.
D) $650 per hour.
Answer: C
Topic: Labor Productivity
Skill: Analytical
Status: Old
AACSB: Analytical Skills
94) If real GDP is $13,500 billion and aggregate hours are 110 billion, labor productivity equals
A) $6.75 per hour.
B) $104 per hour.
C) $123 per hour.
D) $675 per hour.
Answer: C
Topic: Labor Productivity
Skill: Analytical
Status: Old
AACSB: Analytical Skills
95) If real GDP is $11,750 billion and aggregate hours are 175 billion, labor productivity equals
A) $23.50 per hour.
B) $52 per hour.
C) $67 per hour.
D) $235 per hour.
Answer: C
Topic: Labor Productivity
Skill: Analytical
Status: Old
AACSB: Analytical Skills
45
Copyright © 2014 Pearson Education, Inc.
96) An increase in labor productivity relates to
A) working harder over time.
B) working longer over time.
C) producing the same output with fewer labor hours.
D) producing the same output with more labor hours.
Answer: C
Topic: Labor Productivity
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
97) When labor productivity increases, the demand for labor curve ________ and the supply of
labor curve ________.
A) shifts rightward; shifts rightward
B) shifts rightward; does not shift
C) shifts leftward; shifts rightward
D) shift s leftward; does not shift
Answer: B
Topic: Demand for Labor
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
98) If the nation's capital stock increases so that workers become more productive, the
A) demand for labor will increase
B) supply of labor will increase
C) demand for labor will decrease
D) supply of labor will decrease
Answer: A
Topic: Demand for Labor Curve
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
46
Copyright © 2014 Pearson Education, Inc.
100) If both the supply of labor and the demand for labor increase, then
A) potential GDP decreases.
B) potential GDP increases.
C) full employment decreases.
D) the impact on potential GDP is uncertain
Answer: B
Topic: Shifts in Labor Demand and Labor Supply
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
101) An increase in labor productivity ________ the real wage rate and an increase in population
________ the real wage rate.
A) raises; lowers
B) raises; raises
C) lowers; lowers
D) lowers; raises
Answer: A
Topic: Shifts in Labor Demand and Labor Supply
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
47
Copyright © 2014 Pearson Education, Inc.
104) An advance in technology that increases productivity and an increase in the working-age
population results in a
A) rightward shift of the labor supply curve.
B) rightward shift of the labor demand curve.
C) rightward shift of the labor demand curve and of the labor supply curve.
D) no change to the production function.
Answer: C
Topic: Labor Market Equilibrium with an Increase in Productivity
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
105) An advance in technology increases the productivity of labor. As a result, the nation's
production function shifts ________ and the ________ labor curve shifts rightward.
A) upward; demand for
B) downward; demand for
C) upward; supply of
D) downward; supply of
Answer: A
Topic: Labor Market Equilibrium with an Increase in Productivity
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
109) An increase in labor productivity shifts the labor ________ curve ________.
A) demand; rightward
B) demand; leftward
C) supply; rightward
D) supply; leftward
Answer: A
Topic: Labor Market Equilibrium with an Increase in Productivity
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
110) If new capital increases labor productivity, the supply of labor ________ and the demand
for labor ________.
A) stays the same; increases
B) increases; increases
C) increases; decreases
D) decreases; stays the same
Answer: A
Topic: Labor Market Equilibrium with an Increase in Productivity
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
49
Copyright © 2014 Pearson Education, Inc.
111) As a result of the rightward shift in the demand curve for labor from LD0 to LD1, the
equilibrium level of employment ________ and potential GDP ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Topic: Labor Market Equilibrium with an Increase in Productivity
Skill: Graphing
Status: Old
AACSB: Analytical Skills
50
Copyright © 2014 Pearson Education, Inc.
112) The figure above shows the U.S. production function. From 1986 to 2008 the United States
experienced major advances in technology as well as an increase in the working-age population.
The combined effect can best be shown by a
A) movement from point W to point X.
B) movement from point Y to point Z.
C) movement from point Y to point X.
D) movement from point W to point Z.
Answer: D
Topic: Labor Market Equilibrium with an Increase in Productivity
Skill: Analytical
Status: Old
AACSB: Analytical Skills
51
Copyright © 2014 Pearson Education, Inc.
114) The demand for labor curve
A) is downward sloping because productivity of labor diminishes as more workers are employed.
B) is upward sloping and the supply curve of labor is downward sloping.
C) is upward sloping because productivity of labor diminishes as more workers are employed.
D) shifts rightward when the real wage rate rises.
Answer: A
Topic: Study Guide Question, Demand for Labor
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
52
Copyright © 2014 Pearson Education, Inc.
4 Why Labor Productivity Grows
2) Which of the following is NOT an important factor affecting growth in labor productivity?
A) the saving rate
B) the speed with which prices fall
C) the growth rate of physical capital
D) the growth rate of labor productivity
Answer: B
Topic: Factors Creating Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
4) Technological change
A) lowers the real wage rate.
B) decreases labor productivity.
C) has no effect on employment.
D) increases potential GDP.
Answer: D
Topic: Factors Creating Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
53
Copyright © 2014 Pearson Education, Inc.
5) A recent survey by India's central bank reported that spending plans by firms on large new
projects
fell by 46 percent in the year ending March 2012, compared with the prior year. This decrease
will most directly impact
A) physical capital growth.
B) human capital growth.
C) technological change.
D) population growth.
Answer: A
Topic: Factors Creating Economic Growth
Skill: Conceptual
Status: New
AACSB: Analytical Skills
54
Copyright © 2014 Pearson Education, Inc.
8) Which of the following directly creates growth in labor productivity?
I. Growth in capital per hour of labor.
II. Technological change.
III. Population growth.
A) I only
B) II only
C) I and II
D) I and III
Answer: C
Topic: Labor Productivity, Changes in Capital Stock
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
55
Copyright © 2014 Pearson Education, Inc.
12) If capital per worker rises,
A) labor productivity decreases.
B) no technological progress occurs.
C) labor productivity increases.
D) firms respond by raising their prices.
Answer: C
Topic: Labor Productivity, Changes in Capital Stock
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
15) An increase in saving that leads to more capital accumulation ________ labor productivity.
A) increases
B) does not change
C) decreases
D) probably changes but in an ambiguous direction
Answer: A
Topic: Labor Productivity, Changes in Capital Stock
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
56
Copyright © 2014 Pearson Education, Inc.
16) A higher savings rate that leads to an increase in the capital stock
A) leads to higher interest rates.
B) leads to increases in labor productivity.
C) immediately decreases investment.
D) is associated with a decrease in the rate of growth of the population.
Answer: B
Topic: Labor Productivity, Changes in Capital Stock
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
18) If capital per hour of labor increases, real GDP per hour of labor
A) decreases for a given level of technology.
B) increases because the level of technology increases.
C) increases for a given level of technology.
D) decreases because the level of technology decreases.
Answer: C
Topic: Labor Productivity, Changes in Capital Stock
Skill: Analytical
Status: Old
AACSB: Analytical Skills
19) If capital per hour of labor decreases, real GDP per hour of labor
A) decreases because the level of technology decreases.
B) increases because the level of technology increases.
C) increases for a given level of technology.
D) decreases for a given level of technology.
Answer: D
Topic: Labor Productivity, Changes in Capital Stock
Skill: Analytical
Status: Old
AACSB: Analytical Skills
57
Copyright © 2014 Pearson Education, Inc.
20) An increase in education and training
A) increases labor productivity.
B) increases aggregate hours.
C) decreases real GDP growth.
D) increases the employment-to-population ratio.
Answer: A
Topic: Human Capital
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
21) ________ is the knowledge and skill that people have obtained from education and on-the-
job training.
A) Labor productivity
B) Human capital
C) Capital
D) Technology
Answer: B
Topic: Human Capital
Skill: Definition
Status: Old
AACSB: Analytical Skills
58
Copyright © 2014 Pearson Education, Inc.
24) Human capital is, in part, the
A) amount of money held by a worker.
B) stock of knowledge of a worker.
C) stock of plant and equipment.
D) stock of financial assets held by the public.
Answer: B
Topic: Human Capital
Skill: Definition
Status: Old
AACSB: Analytical Skills
27) The more education that workers have, the ________ is their human capital and the
________ is their productivity.
A) larger; higher
B) larger; smaller
C) smaller; higher
D) smaller; smaller
Answer: A
Topic: Human Capital
Skill: Conceptual
Status: Revised
AACSB: Analytical Skills
59
Copyright © 2014 Pearson Education, Inc.
28) During World War II, the increasing productivity of workers who built ships was due
primarily to
A) human capital accumulation through schooling and training.
B) human capital accumulation by repeatedly doing the same tasks.
C) discoveries of new and better technologies.
D) investments by shipyards in new capital equipment.
Answer: B
Topic: Human Capital
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
60
Copyright © 2014 Pearson Education, Inc.
31) In addition to saving and investment in capital, making an even larger contribution to long-
term economic growth in real GDP per person
A) are technological advances.
B) is lower current consumption.
C) is higher current consumption.
D) is a larger work force.
Answer: A
Topic: Labor Productivity, Technological Advance
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
61
Copyright © 2014 Pearson Education, Inc.
5 Growth Theories, Evidence, and Policies
2) The view that population growth occurs when real GDP per person exceeds the amount
necessary to sustain life is part of the ________.
A) classical growth theory
B) modern theory of population growth
C) neoclassical growth theory
D) new growth theory
Answer: A
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
3) An assumption of classical growth theory is that when ________ the population growth rate
________.
A) real GDP per person exceeds the subsistence level; increases
B) people become more skilled; decreases
C) the real wage rate falls; increases
D) saving declines; decreases
Answer: A
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
62
Copyright © 2014 Pearson Education, Inc.
4) Classical growth theory asserts that
A) an increase in the labor supply raises real wage rates.
B) the economy can grow indefinitely.
C) real wage rates fall over time and, as they fall, they increase the population growth rate.
D) population growth is determined by the level of real GDP per person.
Answer: D
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
7) Which of the following predicts that there can be no sustained rise in real GDP per person
above the subsistence level?
A) classical growth theory
B) neoclassical growth theory
C) new growth theory
D) None of the above because all predict that there will be a sustained rise above the subsistence
level.
Answer: A
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
63
Copyright © 2014 Pearson Education, Inc.
8) Classical growth theory argues that when real GDP per person rises above the subsistence
level,
A) technological change slows down, stagnating the economy.
B) population growth increases, driving real GDP per person back to subsistence level.
C) people don't want to work as much, decreasing labor supply.
D) the economy enjoys a period of permanent growth.
Answer: B
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
9) What best explains why real GDP per person is always driven to the subsistence level in the
classical model?
A) Population growth occurs, increasing the supply of labor.
B) Population growth occurs, shifting the labor supply curve leftward.
C) Growth is not possible so the demand for labor never changes.
D) Investment in capital decreases labor demand, decreasing the demand for labor.
Answer: A
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
10) Which of the following ideas are included in classical growth theory?
I. Subsistence real GDP per person
II. Growth in real GDP per person is temporary.
III. Technological change induces investment.
A) I only
B) I and II
C) II and III
D) I, II and III
Answer: B
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
64
Copyright © 2014 Pearson Education, Inc.
11) The assumption that population growth will lead to a fall in real GDP per person rate back to
subsistence level is
A) accepted by all economists today.
B) associated with Malthusians.
C) part of the neoclassical school of growth theory.
D) central to the new growth theory.
Answer: B
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
13) Population increases are the limiting factor in the growth process in
A) classical growth theory.
B) neoclassical growth theory.
C) the new growth theory.
D) real growth theory.
Answer: A
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
14) Classical growth theory proposes that real GDP growth is ________ and that real GDP per
person will ________ the subsistence level.
A) permanent; temporarily be above
B) permanent; always be above
C) temporary; temporarily be above
D) temporary; be above and below
Answer: C
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
65
Copyright © 2014 Pearson Education, Inc.
15) Classical economists believed that
A) real GDP per person would rise above its subsistence level in the long run.
B) real GDP per person would never rise above its subsistence level in the long run.
C) the demand for labor increases when the population increases.
D) population growth decreases as real GDP per person rises.
Answer: B
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
66
Copyright © 2014 Pearson Education, Inc.
19) According to the neoclassical growth theory,
A) increases in labor productivity are only temporary.
B) technological change depends on people's choices.
C) forces other than GDP growth determine population growth.
D) higher saving rates generate permanently faster growth in GDP per person.
Answer: C
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
21) Which of the following ideas apply to the neoclassical growth theory?
I. The rate of technological change influences the rate of economic growth.
II. Technological change promotes saving and investment.
III. Convergence of economic growth rates across countries.
A) I only
B) III only
C) I and II
D) I, II and III
Answer: D
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
67
Copyright © 2014 Pearson Education, Inc.
22) Which of the following ideas apply to the neoclassical growth theory?
I. Technological change results from chance.
II. Growth in real GDP stops if technology stops advancing.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
A recent article states that "...gains from two centuries of rapid technological innovation are
largely exhausted, and new discoveries lack the same revolutionary quality....{Further}, 80
percent of the growth between 1950 and 1993 came from the new application of old ideas, and
these old ideas are now mostly wrung dry."
(The Economist, 03/03/2011)
24) If this quote is true, what would the neoclassical growth theory predict?
A) Economic growth stops because most technological advances have already been made.
B) Economic growth is temporary regardless of technological change and GDP per person
returns to subsistence levels.
C) Economic growth will persist indefinitely because technological change will accelerate again
as firms seek profits.
D) Economic growth will accelerate because these technological changes are permanent.
Answer: A
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: New
AACSB: Analytical Skills
68
Copyright © 2014 Pearson Education, Inc.
25) The neoclassical growth theory says, in part, that
A) a population explosion driven by economic growth will end economic growth.
B) technological change leads to economic growth.
C) the differences in nation's growth rates will persist indefinitely.
D) technology does not play a role in economic growth.
Answer: B
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
69
Copyright © 2014 Pearson Education, Inc.
29) Neoclassical growth theory proposes that
A) technological progress increases the population growth rate and drives down real wages.
B) real GDP per person grows because technological change increases profit opportunities.
C) real GDP growth is caused by growth in the population.
D) discoveries result from choices that increase profits.
Answer: B
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
30) Within neoclassical growth theory, technological change ________ saving and ________
investment.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
31) Neoclassical growth theory is based on the proposition that real GDP per person grows when
A) the population growth rate increases.
B) the population growth rate decreases.
C) technological advances occur.
D) saving decreases.
Answer: C
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
32) According to neoclassical growth theory, the higher real GDP per person from economic
growth will
A) not last because the population will increase.
B) last because there is no link between growth and population.
C) last indefinitely regardless of any other factor.
D) last as long as technological change continues.
Answer: B
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
70
Copyright © 2014 Pearson Education, Inc.
33) Neoclassical growth theory predicts that
A) advances in technology increase the productivity of capital, which leads to an increase in
investment and rising real GDP per person.
B) advances in technology are a result of discoveries motivated by the pursuit of profits.
C) growth in real GDP can increase without any increase in investment.
D) growth in real GDP can continue indefinitely.
Answer: A
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
35) Neoclassical growth theory predicts that China's economic growth rate will ________.
A) decrease when the interest rate increases
B) continue at around 10 percent a year
C) always remain above the U.S. economic growth rate
D) eventually converge to the U.S. economic growth rate.
Answer: D
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
71
Copyright © 2014 Pearson Education, Inc.
37) The notion that technological change is not random but instead is driven by the pursuit of
profits is an essential element of
A) classical growth theory.
B) neoclassical growth theory.
C) the new growth theory.
D) perpetual growth theory.
Answer: C
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
40) Because of the choices people make in the pursuit of profit, new growth theory argues that
A) technology growth slows down in the long-run.
B) population growth increases will bring real GDP per person back to subsistence level.
C) the capital stock experiences diminishing returns.
D) the economy can enjoy persisting economic growth.
Answer: D
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
72
Copyright © 2014 Pearson Education, Inc.
41) ________ predicts that real GDP per person can grow indefinitely.
A) New growth theory
B) Classical growth theory
C) Profit growth theory
D) Neoclassical growth theory
Answer: A
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
73
Copyright © 2014 Pearson Education, Inc.
45) A key feature of the new growth theory is the assumption of
A) diminishing returns to labor.
B) diminishing returns to knowledge.
C) no diminishing returns to knowledge.
D) no diminishing returns to labor.
Answer: C
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
48) Which theory emphasizes the significance of new discoveries that can be used by many
people at the same time?
A) neoclassical growth theory
B) new growth theory
C) classical growth theory
D) None of the above answers are correct.
Answer: B
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
74
Copyright © 2014 Pearson Education, Inc.
49) Which of the following is NOT associated with the new growth theory?
A) natural resources
B) research
C) technology
D) innovation
Answer: A
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
75
Copyright © 2014 Pearson Education, Inc.
52) New growth theory economists believe that:
I. Economic growth can continue as long as we keep finding new ideas.
II. The marginal product of capital diminishes very rapidly, so we must rely upon technological
advances to create economic growth.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: A
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
53) New growth theory proposes that real GDP per person grows because of ________ and that
growth ________.
A) the pursuit of profit; can persist indefinitely
B) productivity shocks; can persist indefinitely
C) technological change; can only increase above the subsistence level temporarily
D) productivity shocks; occurs randomly
Answer: A
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
57) Which one of the following statements about growth theories is correct?
A) In the new growth theory, knowledge is not subject to diminishing returns.
B) In neoclassical growth theory, technological progress is the result of rapid increases in saving
and investment in capital per person.
C) In classical growth theory, real GDP per person is unrelated to the subsistence real GDP.
D) In classical growth theory physical resources are unlimited.
Answer: A
Topic: Sorting Out the Growth Theories
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
58) Ongoing economic growth in real GDP per person requires all of the following except
________.
A) investment in human capital
B) the discovery of new technologies
C) saving and investment in new capital
D) population growth
Answer: D
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
59) Which of the following has NOT been one of the primary sources of economic growth over
the last 200 years?
A) investment in new capital
B) resource conservation
C) investment in human capital
D) discoveries of new technology
Answer: B
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
77
Copyright © 2014 Pearson Education, Inc.
60) Which of the following policy actions could speed productivity growth?
I. Tax incentives to encourage saving.
II. Encouraging international trade.
III. Directing public funds toward financing basic research.
A) II only.
B) I and III.
C) I only.
D) I, II, and III.
Answer: D
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
62) If the saving rate increases, a country's growth rate of real GDP per hour of labor ________
and capital per hour of labor ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Topic: Achieving Faster Growth, Saving
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
78
Copyright © 2014 Pearson Education, Inc.
63) Savings is an important factor influencing economic growth because saving
A) can finance new investment and capital formation.
B) helps the economy maintain the current level of total expenditures when a recession begins.
C) provides a fund for wages needed from any unexpected population growth.
D) All of the above answers are correct.
Answer: A
Topic: Achieving Faster Growth, Saving
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
65) One policy that would increase the saving rate would be
A) raising taxes on the returns to saving.
B) raising taxes on the returns to investment.
C) taxing consumption.
D) raising taxes on saving.
Answer: C
Topic: Achieving Faster Growth, Saving
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
79
Copyright © 2014 Pearson Education, Inc.
67) Activities that encourage faster growth are
A) investment in new capital and human capital.
B) high levels of consumption and low levels of savings.
C) taxes on saving that serve to encourage more spending and less saving.
D) developing trade barriers to protect national industries.
Answer: A
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
68) Which of the following policies improves prospects for more rapid economic growth?
A) policies to increase government expenditure
B) limitations on international trade
C) policies to increase the educational attainment of the labor force
D) encouragement of political instability
Answer: C
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
69) All of the following lead to more rapid economic growth EXCEPT
A) restricting international trade.
B) encouraging higher rates of saving.
C) supporting more research and development.
D) encouraging higher quality education.
Answer: A
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
80
Copyright © 2014 Pearson Education, Inc.
71) Several factors are important for achieving faster economic growth. Which of the following
is one of those factors?
A) expansion of international trade
B) increased government expenditure
C) increased taxes on saving
D) promotion of consumption expenditure
Answer: A
Topic: Achieving Faster Growth, International Trade
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
73) The relationship between education and economic growth can best be summarized by saying
that
A) educated people are less apt to consume goods that deplete economic resources, which
encourages economic growth.
B) educational expenditures tend to divert funds from productive investments, which discourages
economic growth.
C) educational expenditures tend to be inflationary, which discourages economic growth.
D) education has benefits beyond those who receive the education, which encourages economic
growth.
Answer: D
Topic: Achieving Faster Growth, Education
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
81
Copyright © 2014 Pearson Education, Inc.
74) All of the following would increase the growth rate of the economy EXCEPT
A) raising the saving rate.
B) stimulating research and development.
C) discouraging international trade.
D) None of the above answers is correct because they all would increase the growth rate.
Answer: C
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
75) Which of the following will NOT work to increase the rate of economic growth?
A) increase saving
B) limit competition from international trade
C) improve the quality of education
D) All of the above will work to increase the rate of economic growth.
Answer: B
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
79) A factor that turned out to be a weakness of the classical theory of growth is its
A) emphasis on saving and investment.
B) assumption that the growth rate of the population increases when income increases.
C) reliance on constant growth in technology.
D) neglect of the subsistence real wage.
Answer: B
Topic: Study Guide Question, Classical Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
81) In the neoclassical theory of growth, growth in ________ is the result of luck.
A) saving
B) income
C) technology
D) the real interest rate
Answer: C
Topic: Study Guide Question, Neoclassical Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
83
Copyright © 2014 Pearson Education, Inc.
82) A key assumption of new growth theory is that
A) all technological change is the result of luck.
B) higher incomes lead to a higher birth rate.
C) a successful innovator has the opportunity to earn a temporary, above-average profit.
D) the population growth rate is lower than the real interest rate.
Answer: C
Topic: Study Guide Question, New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
83) Which theory of economic growth concludes that growth can continue indefinitely?
A) the classical theory
B) the neoclassical theory
C) the new theory
D) all of the theories
Answer: C
Topic: Study Guide Question, New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
84
Copyright © 2014 Pearson Education, Inc.
6 News Based Questions
The economic growth rate in China between 2000 and 2003 was ________ percent.
A) 30
B) 37
C) 1.97
D) 98
Answer: A
Topic: Economic Growth Rate
Skill: Analytical
Status: Old
AACSB: Analytical Skills
85
Copyright © 2014 Pearson Education, Inc.
3) "IT Policy Can Spur Economic Growth, Industry Says"
As staffers on Capitol Hill know all too well, the growth of technology has created an economy
increasingly reliant on energy consumption, as BlackBerrys, laptops, and other devices become
everyday necessities. The right policies, however, can make IT growth a part of the energy
solution rather than the problem, IT representatives said Monday at a forum, in a congressional
office, hosted by the Information Technology & Innovation Foundation.
Information technology could reduce the expected growth in carbon emissions by one third over
10 years, said Daniel Castro, a senior analyst with the ITIF.
Information and communication technology has "great promise in driving economic growth as
well as reducing emissions," added David Isaacs, director of government affairs for Hewlett-
Packard, but "policy should drive these results."
www.news.cnet.com 11/17/2008
In order to drive economic growth in real GDP per person, the changes in information
technology that the article addresses must
A) cause a movement along the aggregate production function.
B) increase labor productivity.
C) increase labor supply.
D) decrease the demand for labor.
Answer: B
Topic: Increase in Productivity
Skill: Conceptual
Status: Old
AACSB: Communication
86
Copyright © 2014 Pearson Education, Inc.
5) Hu Tells Leaders China Growth Will Help World Economy
Chinese President Hu Jintao told world leaders that his country "has taken an active part in the
international cooperation to deal with the financial crisis'' by providing a "$586 billion economic
stimulus, focused on building low-rent housing, roads, railways and airports. The package also
allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will
also benefit from more subsidies."
Hu stated that "China is in itself an important contribution to international financial stability and
world economic growth.''
www.bloomberg.com 11/15/2008
If the fiscal stimulus spending does generate economic growth, we can expect to see
A) growth in labor productivity.
B) growth China's price level.
C) an excess supply of labor in China's labor market.
D) growth in the supply of labor.
Answer: A
Topic: Increase in Productivity
Skill: Conceptual
Status: Old
AACSB: Communication
87
Copyright © 2014 Pearson Education, Inc.
6) Hu Tells Leaders China Growth Will Help World Economy
Chinese President Hu Jintao told world leaders that his country "has taken an active part in the
international cooperation to deal with the financial crisis'' by providing a "$586 billion economic
stimulus, focused on building low-rent housing, roads, railways and airports. The package also
allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will
also benefit from more subsidies."
Hu stated that "China is in itself an important contribution to international financial stability and
world economic growth.''
www.bloomberg.com 11/15/2008
Which of the following will occur if China's spending generates economic growth in real GDP
per person?
I. There will be an upward shift in China's aggregate production function.
II. There will be a rightward shift in China's labor demand curve.
III. There will be an increase in the real wage.
A) I and II only.
B) I, II and III.
C) I and III only.
D) II and III only.
Answer: B
Topic: Increase in Productivity
Skill: Analytical
Status: Old
AACSB: Analytical Skills
88
Copyright © 2014 Pearson Education, Inc.
7) Hu Tells Leaders China Growth Will Help World Economy
Chinese President Hu Jintao told world leaders that his country "has taken an active part in the
international cooperation to deal with the financial crisis'' by providing a "$586 billion economic
stimulus, focused on building low-rent housing, roads, railways and airports. The package also
allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will
also benefit from more subsidies."
Hu stated that "China is in itself an important contribution to international financial stability and
world economic growth.''
www.bloomberg.com 11/15/2008
The prime minister of Malaysia announced his government's "immediate focus would be to
enhance skills development and improve the quality of education." By "the constant upgrading
of skills of the country's workforce" he hoped to improve the country's "global competitiveness
and raise average incomes of workers."
www.thestar.com.my 11/21/2008
89
Copyright © 2014 Pearson Education, Inc.
9) Strategy to Address Dependence on Foreign Workers, Labour Market Demands
The prime minister of Malaysia announced his government's "immediate focus would be to
enhance skills development and improve the quality of education." By "the constant upgrading
of skills of the country's workforce" he hoped to improve the country's "global competitiveness
and raise average incomes of workers."
www.thestar.com.my 11/21/2008
10) "Why India Cannot Sustain High Economic Growth", by Kunal KumarKundu
In his article about India's prospects for growth, the author notes that "Per capita availability of
food grain is falling as population is growing faster than food grain production. Deplorable rural
infrastructure leads to India wasting an amount of food grain ... . India's agriculture is still so
very highly monsoon dependent..."
www.rediff.com 5/29/2008
90
Copyright © 2014 Pearson Education, Inc.
11) "Why India Cannot Sustain High Economic Growth", by Kunal KumarKundu
In his article about India's prospects for growth, the author notes that "Per capita availability of
food grain is falling as population is growing faster than food grain production. Deplorable rural
infrastructure leads to India wasting an amount of food grain ... . India's agriculture is still so
very highly monsoon dependent..."
www.rediff.com 5/29/2008
If the author is suggesting that India's growth prospects are explained by the classical growth
theory, we also expect that
A) real GDP per worker will increase.
B) the subsistence wage will increase.
C) the economy will perpetually grow.
D) labor productivity, which has risen in recent years, will eventually decline.
Answer: D
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
12) Use the table below to answer this question. The data show national savings rates as a
percentage of GDP; the growth rate of real GDP per person; and birth rates in 2006.
Growth rate
National Saving of real GDP
Country (% of GDP) per person Birth Rate
Japan 28 1.6 9.96
Canada 24 2.6 11.4
Germany 23 1.9 9.35
U.S. 14 1.9 14.2
www.econstats.com; www.os-connect.com
If the data support the neoclassical growth theory, we would expect to see
A) Japan with the highest economic growth rate because the high saving means that more capital
is accumulated.
B) the United States with the highest economic growth rate because a lower savings rate means
more income is spent on consumption.
C) Canada with the highest economic growth rate because it has the highest real GDP per person.
D) the United States with the highest economic growth rate because it has the highest birth rate.
Answer: A
Topic: Neoclassical Growth Theory
Skill: Analytical
Status: Old
AACSB: Analytical Skills
91
Copyright © 2014 Pearson Education, Inc.
13) "Global Innovation 1000—Money Isn't Everything."
The report by Booz Allen Hamilton Consulting claims that "There is no direct relationship
between R&D spending and significant measures of corporate success such as growth,
profitability, and shareholder return. ...However, the pace of corporate R&D spending continues
to accelerate, as many executives continue to believe that enhanced innovation is required to fuel
their future growth.
www.boozallen.com 10/11/2005
14) According to UNESCO reporting, "Governments in North America and Western Europe
invested the highest shares of national resources in education: 5.6 percent of GDP." As a result,
we would expect ________, all else held constant.
www.worldometers.info
92
Copyright © 2014 Pearson Education, Inc.
15) Cuba spends the highest percentage of GDP (18.7 percent) on education while the United
States is the 38th highest spender with 5.7 percent of GDP. If spending on education is
important for economic growth, which of the following statements explain why Cuba's economic
growth rate is lower than the U.S. economic growth rate?
A) Cuba trades with many more countries than does the United States.
B) Cuba doesn't offer property rights that promote innovation.
C) Cuba's population is smaller than the U.S. population.
D) all of the above explain why Cuba's economic growth rate is lower than the U.S. economic
growth rate.
Answer: D
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Analytical Skills
7 Essay Questions
1) How has U.S. real GDP per person changed over the last 100 years?
Answer: Although the U.S. economy usually displays growth in real GDP per person, there have
been periods of time when real GDP per person has fallen. The decline is usually mild, although
this was not the case during the Great Depression, which had a severe decrease in real GDP per
person. Overall, the average yearly growth rate was higher after World War II than prior to the
Great Depression. Prior to the Great Depression, the yearly U.S. growth rate of real GDP per
person averaged only about 1.4 percent per year, while after World War II it averaged 2 percent
per year. And, over the entire 100 years, the U.S. growth rate of real GDP per person has
averaged about 2 percent per year.
Topic: U.S. Economic Growth
Skill: Conceptual
Status: Old
AACSB: Communication
2) Briefly explain how growth in real GDP differs across economies including the United States,
Japan, Africa, Central America, Hong Kong, Korea, and Singapore.
Answer: Over the past 100 years, growth in real GDP per person in the United States has
averaged 2 percent per year. The growth rate has varied from one period to the next. Some rich
nations, such as Japan, are catching up to the U.S. level of real GDP per person. Many poor
nations, especially those in Africa and Central America are not catching up. But Hong Kong,
Korea, Singapore, and Taiwan are generally growing more rapidly than the United States and so
they are catching up.
Topic: Real GDP Growth in the World Economy
Skill: Recognition
Status: Old
AACSB: Communication
93
Copyright © 2014 Pearson Education, Inc.
3) How has the U.S. growth experience compared to that of Central Europe and Africa? How has
compared to the recent experience of Asian nations such as Hong Kong and Singapore.
Answer: A persistent gap in the level of real GDP per person has existed between the United
States and most other nations in the world. Nations from Central Europe and Africa have
consistently grown at a slower rate and have therefore fallen further behind in real GDP per
person. An exception to this rule has been the experience of several Asian nations such as Hong
Kong and Singapore. These and other Asian nations have experienced, on average, higher
growth rates than the United States and so have (partially) closed the gap in real GDP per person.
Topic: Real GDP Growth in the World Economy
Skill: Recognition
Status: Old
AACSB: Communication
4) Discuss the aggregate production function. How does the aggregate production function relate
to the labor market and potential GDP?
Answer: The aggregate production function shows the maximum amounts of real GDP that can
be produced as the quantity of labor changes, holding constant all other influences on aggregate
production. As the quantity of labor increases, real GDP increases but at a decreasing rate, that
is, the aggregate production function shows diminishing returns. The aggregate production
function "stands between" the labor market and potential GDP. In particular, the quantity of
employment is determined in the labor market. The aggregate production function then shows
the amount of real GDP that is produced by this quantity of employment. When the quantity of
employment determined in the labor market is the equilibrium quantity, then the amount of real
GDP produced is potential GDP.
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Communication
5) Define the aggregate production function. Discuss why the aggregate production function
exhibits diminishing returns.
Answer: The aggregate production function is the relationship that shows the maximum quantity
of real GDP that can be produced as the quantity of labor employed changes and all other
influences on aggregate production remain the same. The aggregate production function exhibits
diminishing returns because the quantity of capital (and other resources) is fixed. As more labor
is hired, the extra output produced decreases because the extra workers have less capital with
which to work. As a result, the additional workers cannot produce as much additional output as
did the previously hired workers.
Topic: Aggregate Production Function
Skill: Conceptual
Status: Old
AACSB: Communication
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6) What is the real wage rate?
Answer: The real wage rate is the money wage rate "corrected" for changes in the price level. It
is calculated by dividing the money wage rate by the price level. The real wage rate is the
quantity of goods and services that can be purchased by an hour's worth of work.
Topic: Real Wage Rate
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
7) Explain how the labor market and the production function determine potential GDP.
Answer: The labor market determines the equilibrium quantity of labor. In other words, the
amount of employment is determined by supply and demand in the labor market. The production
function shows the amount of output, real GDP, that is produced for all different amounts of
employment. Intuitively, the production function "converts" the amount of employment from the
labor market into real GDP. If the labor market is in equilibrium, so that the level of employment
is equal to full employment, then the amount of real GDP produced, determined from the
production function is potential GDP.
Topic: Labor Market and Potential GDP
Skill: Conceptual
Status: Old
AACSB: Communication
8) How will an increase in physical capital affect labor productivity, labor demand, and potential
GDP?
Answer: An increase in capital increases labor productivity. It shifts the production function
upward and, because productivity has increased, it increases the demand for labor. Equilibrium
employment increases because of the increase in demand for labor. Potential GDP increases
because employment increases and because the production function has shifted upward.
Topic: Labor Market and Potential GDP
Skill: Conceptual
Status: Old
AACSB: Communication
9) What happens to the real wage rate and potential GDP if population increases?
Answer: An increase in population increases the supply of labor. As a result, the labor supply
curve shifts rightward. The labor demand curve does not shift. The increase in the supply of
labor means that employment increases and the real wage rate falls. The economy moves along
its (unchanged) production function to a higher level of potential GDP.
Topic: Labor Market and Potential GDP
Skill: Conceptual
Status: Old
AACSB: Communication
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10) With no change in labor productivity, what would happen to the real wage rate and potential
GDP if the population increased?
Answer: An increase in population increases the supply of labor. As a result, the labor supply
curve shifts rightward. Neither the labor demand curve not the production function shifts. The
increase in the supply of labor means that employment increases and the real wage rate falls. The
economy moves along its (unchanged) production function to a higher level of potential GDP.
Topic: Labor Market and Potential GDP
Skill: Conceptual
Status: Old
AACSB: Communication
11) What is the effect on real GDP per person if labor productivity increases?
Answer: Real GDP equals (aggregate hours) × (labor productivity). Hence an increase in labor
productivity increases real GDP. Real GDP per person equals (real GDP)/(population). Therefore
an increase in real GDP with no change in the population increases real GDP per person.
Topic: Labor Productivity
Skill: Conceptual
Status: Old
AACSB: Communication
12) Define labor productivity. Discuss the relationship between labor productivity, human capital
growth, and technology change.
Answer: Labor productivity is real GDP per hour of labor, so it equals (real GDP) ÷ (aggregate
hours). The expansion of human capital and the discovery of new technology are two factors that
increase labor productivity. Increasing human capital increases labor productivity because
workers' skills and knowledge increase, which allows them to produce more goods and services
without boosting aggregate hours. Similarly, the discovery and use of new technologies allows
workers to produce more goods and services without increasing aggregate hours.
Topic: Labor Productivity
Skill: Conceptual
Status: Old
AACSB: Communication
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14) List and explain the factors that can increase labor productivity.
Answer: The three factors that can increase labor productivity are saving and investment in
physical capital, expansion of human capital, and discovery of new technology. Saving and
investing in physical capital increases the amount of capital per worker and thereby increases
workers' productivity. Increasing the amount of human capital means that workers' skills,
knowledge, and talents increase, which thereby increases their productivity. And, the discovery
and use of new technologies allows workers to produce more goods and services than before,
which increases their productivity.
Topic: Labor Productivity
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
16) What are the basic arguments of the classical growth theory?
Answer: The classical growth theory originated during the late 18th century. Although proposed
by many leading economists of the time, it has most often associated with Malthus. The classical
theory states that economic growth will be temporary. The reason why the growth is temporary is
because any economic growth will lead to a population explosion. The growth in population
increases labor hours, which lead to a reduction in capital per labor hour. Productivity declines
until real GDP per person falls to the subsistence level where life is just sustained. At this point,
economic growth ceases.
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
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17) What is the main difference between classical economists' ideas about economic growth
versus what modern evidence suggests?
Answer: Classical economists assumed that as real GDP per person rises, the population growth
rate increased. But, contrary to this assumption, the data show that population growth rate is
approximately independent of the economic growth rate. Classical economists concluded that the
increase in population, which increases labor supply, would drive real GDP per person back to
the subsistence level. But the data show that in advanced nations real GDP per person is well
above the subsistence wage rate.
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
18) In the classical theory of growth, what is the final outcome of an increase in growth and
labor productivity?
Answer: In the classical growth theory, a rise in labor productivity and the resulting economic
growth result in a population explosion that drives real GDP per person back to the subsistence
level. In the classical viewpoint, resources are limited and technological change occurs
infrequently, so that technological advances are not sufficient to compensate for the lack of
resources. Hence, in the long run people earn only a subsistence level of real income.
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
19) What are the basic arguments of the neoclassical growth theory?
Answer: The neoclassical growth theory explains economic growth as the result of technological
change. Technological change leads to a level of saving and investment that makes capital per
hour of labor grow. Growth, therefore, only ends if technological change ends. However the
theory looks at technological change as being the result of chance and luck and so offers no
explanation for how or why technological change occurs.
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
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20) "According to the neoclassical growth theory, national incentives to save, invest, accumulate
human capital, and develop new technology influence the country's growth rate of real GDP."
Comment on the accuracy of the previous statement.
Answer: The sentence is inaccurate. The neoclassical growth theory says that a nation's growth
rate of real GDP depends on the growth rate of technology. The neoclassical growth theory
assumes that the growth rate of technology is the result of chance and luck. It is the new growth
theory that asserts that growth depends on people's incentives, so it is the new growth theory that
predicts that a nation's growth rate depends on its national incentives to save, invest, accumulate
human capital, and develop new technology.
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
21) What is the role of profits in the neoclassical growth theory versus the new growth theory?
Answer: Profits play essentially no role in the neoclassical growth theory. In the new growth
theory, they are key because it is based on the idea that technological change results from the
choices that people make in the pursuit of profit. Discoveries result from people's choices, such
as whether to look for something new and, if so, how intensively to look. Profit affects these
choices. A new discovery brings the discovered high profits but eventually competitors emerge
and the above-average profit is competed away.
Topic: Neoclassical and New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
22) What is the main shortcoming of the neoclassical growth model and how does the new
growth theory address this shortcoming?
Answer: One difficulty with the neoclassical model is that it predicts all nations will converge to
the same level of per capita income. The new growth theory is based on the idea that
technological change results from the choices that people make in the pursuit of profit. So if
people in different nations face different incentives to innovate, technological progress and hence
economic growth can differ among nations.
Topic: Neoclassical and New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
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23) How does the new growth theory explain economic growth?
Answer: The new growth theory explains growth as the result of choices made in the pursuit of
profit. If people choose to look intensively for new technologies they will be found more
quickly. Profit is the motive to look for technological change. The reason is that competition
squeezes profits. Firms are constantly looking for ways to reduce costs and increase profits
through technological change. The economy can grow forever as long as people make the
choices that encourage the search for new technologies.
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Communication
24) Of the three economic growth theories, which is the most optimistic about the chances of real
GDP per person growing indefinitely? Which is the most pessimistic? What accounts for the
differences?
Answer: The most optimistic is the new growth theory, which concludes that real GDP per
person can continue to grow indefinitely. The most pessimistic is the classical theory, which
concludes that growth in real GDP per person will stop and that people will produce only the
subsistence level of real GDP per person. The difference in the two conclusions can be traced to
differences in assumptions in three key areas. First, the new growth theory concludes that
technology will advance forever because people, seeking profit, make decisions to develop new
technology. Classical growth theory assumes that technological advances are rare and infrequent.
Second, the new growth theory assumes that the economy is not subject to diminishing returns.
Hence, as the economy accumulates more capital, the returns to capital do not diminish and so
the incentive to add yet more capital continues undiminished. The classical growth theory
assumes that capital (and labor) is subject to diminishing returns. Thus as more capital is
accumulated, the returns diminish and so the incentive to continue adding more capital
disappears. Thus the capital stock eventually stops growing. Finally, the new growth theory
assumes that the population does not grow more rapidly as real GDP per person increases. The
classical theory assumes that whenever real GDP per person exceeds the subsistence level, rapid
population growth occurs and, because of diminishing returns to labor, the increased population
drives the level of real GDP back to the subsistence amount.
Topic: Growth Theories
Skill: Conceptual
Status: Old
AACSB: Communication
100
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25) Explain the role played by technological change in classical growth theory, neoclassical
growth theory, and new growth theory.
Answer: Technology plays a secondary role in classical growth theory. While technology might
increase real GDP in the classical growth model, population changes drive real GDP per person
back to a subsistence level of income. Technology also plays a secondary role in neoclassical
growth theory. Neoclassical theory has technological change bringing about an increase in real
GDP but diminishing returns brings an end to economic growth. The new growth theory
emphasizes the role of technological change in creating continuous growth because
entrepreneurs have an incentive to develop new technologies as a means of generating profits for
themselves.
Topic: Growth Theories
Skill: Conceptual
Status: Old
AACSB: Communication
26) Suppose the President asks you to write him a letter suggesting ways the government might
help the economy achieve permanently higher rates of economic growth. Based on your
understanding of growth theory and growth accounting, what would you suggest?
Answer: According to both neoclassical and new growth theories, the key to faster growth is
generating higher rates of technological progress. Because many technological advances are
embodied in new capital, sustaining a high rate of saving and investment is important.
Government might help stimulate saving supply by tax incentives such as IRAs and stimulate
investment demand by offering investment tax credits, accelerated depreciation and reductions in
corporate profit tax rates. New ideas are also embodied in human capital. Government can
finance education and training directly and provide low-interest loans to students and training tax
credits to businesses. Finally, we need to generate more new ideas, by stimulating research and
development efforts. This includes government funding of basic research and tax credits to
businesses for R&D expenses.
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Communication
27) Describe ways that governments can promote faster economic growth.
Answer: Policies for increasing the economic growth rate are 1) Stimulate saving (for instance,
tax incentives could be directed at increasing saving which will then increase the capital stock);
2) Stimulate research and development (inventions can be copied, so government subsidies can
lead to more inventions that spread throughout the economy); 3) Encourage international trade
(free international trade encourages economic growth because free trade extracts all the possible
gains from specialization and exchange); 4) Improve the quality of education (education creates
benefits beyond the ones enjoyed by the students who receive education).
Topic: Achieving Faster Economic Growth
Skill: Conceptual
Status: Old
AACSB: Communication
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8 Numeric and Graphing Questions
Employment
(billions of Real GDP
hours per (billions of
year) 2005 dollars)
6 95
5 90
4 80
3 60
2 30
1) The first table above gives the labor demand and labor supply schedules for a nation. The
second table gives its production function.
a) What is the equilibrium real wage rate and the level of employment?
b) What is potential GDP?
Answer: a) The equilibrium real wage rate is $15 an hour because this is the real wage rate
for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of
employment is 3 billion hours a year.
b) With employment equal to 3 billion hours per year, potential GDP is equal to $60 billion.
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
102
Copyright © 2014 Pearson Education, Inc.
Labor demand Labor supply
Real wage rate (billions of (billions of
(2005 dollars) hours per hours per
year) year)
30 100 700
25 200 600
20 300 500
15 400 400
10 500 300
Employment
(billions of Real GDP
hours per (trillions of
year) 2005 dollars)
200 3.0
300 4.0
400 4.8
500 5.4
600 5.8
2) The first table above gives the labor demand and labor supply schedules for a nation. The
second table gives its production function.
a) What is the equilibrium real wage rate and the level of employment?
b) What is potential GDP?
Answer: a) The equilibrium real wage rate is $15 an hour because this is the real wage rate
for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of
employment is 400 billion hours a year.
b) With employment equal to 400 billion hours per year, potential GDP is equal to $4.8 trillion.
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
103
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Labor demand Labor supply
Real wage rate (billions of (billions of
(2005 dollars) hours per hours per
year) year)
5 360 260
10 325 275
15 300 300
20 280 330
Employment
(billions of Real GDP
hours per (trillions of
year) 2005 dollars)
100 2.0
200 3.0
300 3.8
400 4.4
3) The first table above gives the labor demand and labor supply schedules for a nation. The
second table gives its production function.
a) What is the equilibrium real wage rate and the level of employment?
b) What is potential GDP? If you cannot determine a precise amount, give the range in which
potential GDP must lie.
Answer: a) The equilibrium real wage rate is $15 an hour because this is the real wage rate
for which the quantity of labor demanded equals the quantity supplied. The equilibrium level of
employment is 300 billion hours a year.
b) With employment equal to 300 billion hours per year, potential GDP is equal to $3.8 trillion.
Topic: Labor Market Equilibrium
Skill: Analytical
Status: Old
AACSB: Analytical Skills
4) Real GDP equals $12 trillion and aggregate hours equals 300 billion hours. What does labor
productivity equal?
Answer: Labor productivity is (real GDP)/(aggregate hours), so labor productivity equals ($12
trillion)/(300 billion hours) = $40 per hour.
Topic: Labor Productivity
Skill: Analytical
Status: Old
AACSB: Analytical Skills
104
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9 True or False
1) Economists are interested in long-term economic growth because growth increases real GDP
per person and improves our standard of living.
Answer: TRUE
Topic: Economic Growth Rate
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
2) Over the last 100 years, real GDP per person in the United States has grown at an average rate
of approximately 2 percent per year.
Answer: TRUE
Topic: Growth in the U.S. Economy
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
3) The United States had the largest real GDP per person until the 2012 when the China's real
GDP per person overtook and then exceeded that in the United States.
Answer: FALSE
Topic: Real GDP Growth in the World Economy
Skill: Recognition
Status: Revised
AACSB: Reflective Thinking
4) Because the United States is a developed economy, every other country is catching up to the
level of U.S. real GDP per person.
Answer: FALSE
Topic: Real GDP Growth in the World Economy
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
5) The gap between real GDP per person in the United States and South America has been
narrowing since 1980.
Answer: FALSE
Topic: Real GDP Growth in the World Economy
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
105
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6) Real GDP per person is slowly converging around the world.
Answer: FALSE
Topic: Real GDP Growth in the World Economy
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
7) Labor productivity has grown at almost the same rate each year over the last 40 years in the
United States.
Answer: FALSE
Topic: Labor Productivity
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
8) If the price level rises faster than the money wage rate, the real wage rate falls.
Answer: TRUE
Topic: Real Wage Rate
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
9) The real wage rate measures the quantity of goods and services an hour's work will buy.
Answer: TRUE
Topic: Real Wage Rate
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
10) The demand curve for labor shows how many hours workers demand to work.
Answer: FALSE
Topic: Demand for Labor
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
11) In general, a higher real wage rate decreases the quantity of labor supplied because fewer
people enter the labor force.
Answer: FALSE
Topic: Labor Supply
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
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12) The higher the real wage rate, the higher the labor force participation rate.
Answer: TRUE
Topic: Labor Supply
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
13) To achieve faster growth, economies can increase income tax rates in order to increase
saving rates.
Answer: FALSE
Topic: Achieving Faster Growth, Saving
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
14) Faster long-term growth can be achieved by discouraging saving and encouraging
consumption.
Answer: FALSE
Topic: Achieving Faster Growth, Saving
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
16) The classical growth theory shows how technology changes continually generate economic
growth.
Answer: FALSE
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
17) The classical growth theory's view of the economy and its ability to achieve growth can be
compared to a perpetual motion machine.
Answer: FALSE
Topic: Classical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
107
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18) The neoclassical growth theory is based on a subsistence real wage rate.
Answer: FALSE
Topic: Neoclassical Growth Theory
Skill: Recognition
Status: Old
AACSB: Reflective Thinking
19) The neoclassical growth theory concluded that economic growth is temporary because of a
population explosion that occurs as a result of economic growth.
Answer: FALSE
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
20) In neoclassical growth theory, technological progress is the key to continuous growth in
labor productivity.
Answer: TRUE
Topic: Neoclassical Growth Theory
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
21) New growth theory claims that economic growth occurs because firms reap profits from
research and add to the stock of capital.
Answer: TRUE
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
22) New growth theory holds that choices, and the discoveries that result from them, result in
growth that is temporary in nature.
Answer: FALSE
Topic: New Growth Theory
Skill: Conceptual
Status: Old
AACSB: Reflective Thinking
108
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10 Extended Problems
1) The people of Palm Island are willing to work 80 hours a day for a real wage rate of $4 an
hour. Then each dollar increase in the real wage, they are willing to work 10 additional hours a
day. Palm Island's production possibilities are in the table above.
a) Draw Palm Island's demand for labor curve.
b) Draw Palm Island's supply of labor curve.
c) What are the full-employment equilibrium real wage rate and quantity of labor in Palm
Island's economy?
d) What is Palm Island's potential GDP?
Answer:
a) See the figure above. Palm Island's demand for labor curve is the marginal product of labor
curve. The marginal product of labor for each quantity of labor employed is the change in real
GDP divided by the change in quantity of labor employed. For example, 100 hours of labor
employed is the midpoint between 80 and 120 hours on the production function. The 40 hors of
additional labor between 80 and 100 hours produce of additional real GDP.
So for these 40 hours of labor, one hour will produce additional real GDP of
So the marginal product of labor is $10 per hour when 100 hours of labor
are employed. The rest of the marginal products are calculated similarly and are in the figure
above.
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b) The figure above shows the labor supply curve.
c) The full-employment equilibrium real wage rate is the one at which the quantity of labor
demanded equals the quantity of labor supplied so that real GDP is at its full-employment level.
In the economy of Palm Island, the figure above shows that the full-employment equilibrium real
wage rate is $8 per hour and the full-employment quantity of labor is 120 hours per day.
d) Potential GDP is the level of real GDP at full employment. As the figure above shows, Palm
Island's full employment is 120 hours per day. And the production function shows that 120 hours
of labor can produce a real GDP of $1,280. So Palm Island's potential GDP is $1,280 per day.
Topic: Labor Market and Potential GDP
Skill: Analytical
Status: Old
AACSB: Analytical Skills
110
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