Mankiw, Macroeconomics, 7e Chap 7 completed Total score: 7 out of 21, 33% 1 of 21

The Solow growth model assumes that the production function exhibits A. decreasing returns to scale. B. C. constant returns to scale.

D. increasing marginal product. 0 out of 1 Incorrect. The correct answer is B. The production function used in the Solow growth model exhibits constant returns to scale. See Section 7-1. 2 of 21

increasing returns to scale.

Which of the following is not assumed by the Solow growth model?

A. constant returns to scale in production B. output depends only on capital, labor, and technology C. diminishing marginal products of labor and capital D. output is constant 0 out of 1 Incorrect. The correct answer is D. In the Solow growth model, output varies if capital, labor, or technology change. See Section 7-1. 3 of 21 In the Solow model, the depreciation rate represents the A. fraction of income taken by taxes. C. inflation rate. B. difference between the nominal and real interest rates. D. fraction of the capital stock that wears out each year. 1 out of 1 Correct. The answer is D. For a discussion of the depreciation rate used in the Solow growth model, see 4 of 21 Section 7-1.

The change in the capital stock is equal to A. investment. B. C.

investment - depreciation. investment - inflation.

D. investment - depreciation - inflation. 1 out of 1 Correct. The answer is B. Investment is the amount of new capital added each period, depreciation is the amount of capital that wears out each period. See Section 7-1. 5 of 21

Suppose that the capital stock is 100, the depreciation rate is 10 percent per year, and output is 25. What must the saving rate be to keep the capital stock constant?

A. 2.5 percent B. 10 percent C. 25 percent D. 40 percent 0 out of 1 Incorrect. The correct answer is D. Total depreciation is 10 units per year. If the saving rate is 40 percent, total investment will also be 10 units per year, and the capital stock will be constant. See Section 7-1.

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If the capital stock is above the steady-state level, then investment A. is smaller than depreciation. B. is larger than depreciation. C. is equal to depreciation. 1 out of 1

D. could be higher than, lower than, or equal to depreciation.

Correct. The answer is A. Since the capital stock is above its steady-state level, it must be falling. This occurs when investment is smaller than depreciation. See Section 7-1. 7 of 21

If an economy is initially in a steady state and it experiences an increase in its saving rate, then the steadystate capital stock will B. stay the same. C. rise. D. rise only if depreciation also rises. A. fall.

1 out of 1

Correct. The answer is C. If the saving rate rises, the steady-state level of the capital stock will also rise. See Section 7-1. 8 of 21

Suppose that output per worker is 10, the production function is y = sqrt(k) [that is, output per worker is equal to the square root of capital per worker] and the total capital stock is 1,000. How large is the labor force? A. 1

B. 10

C. 100

0 out of 1

D. 1,000

Incorrect. The correct answer is B. If y = 10, then k = 100. Since k is the amount of capital per worker and the total amount of capital is 1,000, there must be 10 workers. See Section 7-1. 9 of 21

Suppose that the production function is y = sqrt(k) [that is, output per worker is equal to the square root of possible level of output in the steady state? A. 25 percent B. 50 percent

capital per worker], s = 0.40, and [the depreciation rate] = 0.10. What level of saving will lead to the highest

C. 75 percent 1 out of 1

D. 100 percent

Correct. The answer is D. Since output is at its highest when the capital stock is at its highest, using all of situation is that consumption will be zero. See Section 7-1. 10 of 21

output to produce capital will lead to the highest possible steady state level of output. The drawback to this

Suppose that the production function is y = sqrt(k) [that is, output per worker is equal to the square root of capital per worker], s = 0.40, and [the depreciation rate] = 0.10. What is the steady-state level of capital?

0 out of 1

A. 2

B. 4

C. 10

D. 16

Incorrect. The correct answer is D. In the steady state: s y = k. So 0.4*sqrt(k) = 0.1*k. This formula can be rearranged to yield sqrt(k) = (0.4/0.1). Thus, k = 16. See Section 7-1. 11 of 21

A war has wrecked the economy of Baloneya: both the capital stock and the work force have been reduced by 50 percent. If the economys production function has constant returns to scale, how will the postwar level of output per worker compare to the prewar level? A. It will be lower. B. It will be higher.

C. It will be the same.

D. It could be higher or lower. 1 out of 1

Correct. The answer is C. Output per worker depends only on the level of capital per worker. Since capital per worker does not change in this case, neither does the level of output per worker. See Section 7-1. 12 of 21

The Golden Rule level of capital accumulation is defined as the level of the capital stock that achieves a steady state with the A. highest rate of savings.

B. highest level of income.

C. highest level of consumption. 0 out of 1 D. lowest level of depreciation.

Incorrect. The correct answer is C. For a discussion of the Golden Rule level of capital accumulation, see Section 7-2. 13 of 21

At the Golden Rule level of capital accumulation, the marginal product of capital equals the A. real interest rate. C. savings rate. 0 out of 1 B. depreciation rate. D. marginal product of labor.

Incorrect. The correct answer is B. For a discussion of the Golden Rule level of capital accumulation, see Section 7-2. 14 of 21

Suppose that an economy is in steady state and has more capital than it would have in the Golden Rule steady state. A policymaker would want to pursue policies aimed at decreasing A. consumption. 0 out of 1 population growth. B. the rate of saving. C. the depreciation rate. D. the rate of

Incorrect. The correct answer is B. Reducing the saving rate will reduce the level of capital in the steady state. See Section 7-2.

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An economy starts off in a steady state with less capital than at the Golden Rule level. Now the saving rate to the Golden Rule steady state?

changes to the level that will achieve the Golden Rule. What is the path of consumption during the transition A. It is lower, then higher than in the initial steady state. B. It is higher, then lower than in the initial steady state. C. It is always lower than in the initial steady state. 0 out of 1 D. It is always higher than in the initial steady state.

Incorrect. The correct answer is A. The saving rate must rise to achieve the Golden Rule. This will reduce consumption immediately, but will raise it in the long run. See Figure 7-10. 16 of 21

An economy is in a steady state with capital higher than the Golden Rule level. Now the saving rate falls to a level that will achieve the Golden Rule capital stock in the long run. What will happen to the level of consumption between the initial and new steady states? A. It will rise gradually. B. It will fall instantly and then will rise gradually. C. It will rise instantly and then will fall gradually 0 out of 1 D. It will rise instantly and then will remain constant.

Incorrect. The correct answer is C. As shown in Figure 7-9, the level of consumption rises instantly and then falls gradually until it reaches its Golden Rule level. 17 of 21

If two economies are identical except for their rates of population growth, then the economy with the higher rate of population growth will have A. higher steady-state output per worker. B. higher steady-state capital per worker. D. lower steady-state output per worker. C. higher steady-state consumption per worker. 0 out of 1

Incorrect. The correct answer is D. As discussed in Section 7-3, an economy with a higher rate of population growth will have lower steady-state levels of capital, output, and consumption per worker. 18 of 21

If two economies are identical except for their rates of population growth, then if both economies are in steady state, the economy with the higher rate of population growth will have a A. lower rate of growth of total output. B. higher rate of growth of total output.

C. lower rate of growth of output per person. 0 out of 1

D. higher rate of growth of output per person.

Incorrect. The correct answer is B. Both economies have constant levels of output per person in the steady

state. However, the growth rate of total output in each economy depends on the rate of population growth. Section 7-3.

This means that total output in the economy with the higher rate of population growth will grow faster. See

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If the population growth rate decreases in an economy described by the Solow growth model, the line representing population growth and depreciation will A. shift upward. B. shift downward. C. stay the same. 0 out of 1 D. cross the investment curve at the same point.

Incorrect. The correct answer is B. Decreasing the rate of population growth shifts the line downward. See figure 7-12 in Section 7.3. 20 of 21

In the Solow growth model with population growth, the Golden Rule steady state is achieved when the marginal product of capital equals A. the savings rate. B. the population growth rate.

C. the population growth rate plus the rate of depreciation. 0 out of 1 D. the proportion of output that goes to wages.

Incorrect. The correct answer is C. As explained in Section 7.3, at the Golden Rule steady state the marginal product of capital net of depreciation equals the rate of population growth. 21 of 21

Suppose that the production function is y = k0.5 [that is, output per worker is equal to the square root of = 0.10. What is the Golden Rule level of capital per capita? 1 out of 1 A. 20 B. 25 C. 30 D. 35

capital per worker], s [the saving rate] = 0.20, n [the population growth rate] = 0, and [the depreciation rate]

Correct. The answer is B. Since y = k0.5, the marginal product of capital equals 0.5*k-0.5. Equating this value to the depreciation rate (), which equals 0.10, yields a level of per-capita capital equal to 25. Perception licensed to Bedford, Freeman & Worth Publishing Group