Effects Of An increase in the saving rate

Please, do not use a calculator or any other devices such as cell phones or computers.

1. An increase in the saving rate willnotaffect which of the following variables in the long run?

A. the growth rate of output per worker. B. capital per worker.

C. output per worker. D. the amount of capital in the economy.

2. Which of the following variables willnotchange when the economy reaches steady state equilibrium? Recall that the population is assumed to be constant over time.

A. capital per worker. B. capital. C. output. D. all of above

3. Suppose that Kt+1/N < Kt/N. The steady-state level of capital per worker (K/N) will be .

A. greater than. B. less than. C. equal to.

4. In question 3, output per worker (Y/N) in period t is ____ period t-1.

A.greater than B. less than C. equal to

5. In question 3, the economy will reach or reached a steady-state (long-run equilibrium) in period __ (choose the best one, given the information available).

A. t-2. B. t-1. C. t D. t+2

6. In question 3, depreciation per worker is _____ saving per worker at time t-1.

A. less than. B. greater than. C. equal to.

7. If Kt+1/N = Kt/N,

A. output per worker grows at a positive rate in period t .

B. investment per worker equals depreciation per worker in period t.

C. capital per worker grows at a positive rate in period t.

8. In the steady state,

A. consumption per worker is maximized.

B. the growth rate of output per worker equals zero.

C. investment per worker exceeds depreciation per worker.

D. capital per worker grows.

9. Countries X and Y are identical, except that the saving rate in country X is lower than the saving rate in country Y. Then, _____ in the long run.

A. the capital-labor ratios (K/N) will be the same in both countries.

B. the growth rate of output per capita will be the same in both countries.

C. the growth rate of output per capita will be greater in Y than in X.

D. the growth rate of output per capita will be greater in X than in Y.

10. Countries X and Y are identical, except that the saving rate in country X is lower than the saving rate in country Y. Then, _____ in the long run.

A. the capital-labor ratio (K/N) will be greater in X than in Y

B. the capital-labor ratio (K/N) will be less in X than in Y

C. the capital-labor ratio (K/N) in X will be the same as that in Y

For questions 11-14, suppose that Kt+2/N < Kt+3/N.

11. The economy reaches the long-run equilibrium (steady-state) in period __ (choose the best one, given the information available).

A.t-3 B. t C. t+2 D. t+4

12. The steady-state level of capital per worker (K/N) will be .

A. greater than. B. less than. C. equal to.

13. Output per worker (Y/N) in period t+2 is ____ period t+1.

A.greater than B. less than C. equal to

14. At time t+2, depreciation per worker is _____ saving per worker.

A. less than. B. greater than. C. equal to.

For questions 15-17, assume that Countries x and y are identical, except that the saving rate in country x is 20% while the saving rate in country y is 10%. Assume further that in the long run, the capital-labor ratio (K/N) in Country x is 5 and the output per worker (Y/N) in Country x is 20.

15. In the long run, the capital-labor ratio (K/N) in Country y is ___ (choose the best one, given the information available).

A.3 B. 5 C. 8 D. 20

16. In the long run, the growth rate of capital per worker (K/N) in Country x is ___ %.

A.0 B. 2 C. 5 D. 8

17. In the long run, output per worker (Y/N) in Country y is ___ (choose the best one, given the information available).

A.15 B. 20 C. 25 D. 30

18. If a rich countrys per capita GDP grows faster than a poor countrys, the two countries will ___ in terms of per capita GDP.

A.converge B. diverge C.have the same outcome.

19. Which is an example of the aggregate production function, Y = F(K, N), that exhibits constant returns to scale?

A.Y = KN B. Y= 2K+N C. Y = K/N D. Y= (K+N)K

20. Explain your answer to question 3.

21. A famous economist, Thomas Malthus, argued in 1798 that population growth would outpace agricultural (food) production, forcing humans to return to . However, his prediction has not been supported by data. Discuss his shortcomings in the context of economic growth.

Answer Key

1. A. 2. D 3. B 4. B 5. D

6. B. 7. B 8. B 9.B 10.B

11.D 12.A 13.A 14.A 15.A

16.A 17.A 18.B 19.B

20. Since Kt+1/N < Kt/N, it must be that at time t, depreciation per worker exceeds saving per worker. As time goes on, to fall until depreciation per worker equals saving per worker (this situation is called the steady-state). Thus, K/N at the steady-state should be lower than Kt/N.

21. Even with the same amount of land, technologies allow us to produce more agricultural output, .