Question 1

Suppose Country A and Country B both start with a real GDP per capita of $5,000 in 1960. Country A grows at 1.61% per year, while Country B grows at 2.2% per year. After 60 years, which country will have a higher standard of living, and why?

Accepted Answer

Country B, because a higher growth rate compounded over time results in a much higher real GDP per capita.

Question 2

Which of the following best describes the concept of 'creative destruction' as developed by Joseph Schumpeter?

Accepted Answer

The process by which new products and technologies replace old ones, leading to economic growth.

Question 3

According to the per-worker production function, what happens to output per hour worked as capital per hour worked increases, holding technology constant?

Accepted Answer

Output per hour worked increases, but at a decreasing rate due to diminishing returns.

Question 4

Which of the following is NOT a source of technological change according to the economic growth model?

Accepted Answer

Increasing the quantity of money in circulation.

Question 5

If a country’s real GDP is rising by 2% per year while its population is rising at 3% per year, what is happening to its standard of living?

Accepted Answer

The country’s standard of living is falling.

Question 6

Which of the following best explains why knowledge capital leads to increasing returns at the economy-wide level?

Accepted Answer

Knowledge capital is nonrival and nonexcludable, so its use by one firm does not reduce its availability to others.

Question 7

Which of the following government policies is most likely to encourage long-term economic growth in a developing country?

Accepted Answer

Strengthening property rights and the rule of law.

Question 8

Suppose a country increases its capital per hour worked but does not experience any technological change. According to the per-worker production function, what will eventually happen to the growth rate of output per hour worked?

Accepted Answer

It will decrease due to diminishing returns to capital.

Question 9

Which of the following is an example of foreign direct investment (FDI)?

Accepted Answer

American Airlines builds a hub in China.

Question 10

The catch-up effect predicts that:

Accepted Answer

Countries with lower initial levels of real GDP per capita will grow faster than richer countries, all else equal.

Question 11

Which of the following is the best measure of a country’s standard of living?

Accepted Answer

Real GDP per capita.

Question 12

Why did the Industrial Revolution begin in England, according to Douglass North?

Accepted Answer

The Glorious Revolution established property rights and limited the power of the king, encouraging investment.

Question 13

Which of the following is a reason why some low-income countries fail to experience rapid economic growth?

Accepted Answer

Political instability and civil wars.

Question 14

Suppose a country’s government wants to encourage technological change. Which policy would be most effective?

Accepted Answer

Subsidizing research and development (R&D) activities.

Question 15

If a country’s financial system is underdeveloped and insecure, what is the likely impact on economic growth?

Accepted Answer

It will create a vicious cycle of low saving and investment, hindering growth.

Question 16

Which of the following best explains why technological change is more important than capital accumulation for sustaining long-term economic growth?

Accepted Answer

Technological change is not subject to diminishing returns and can continuously increase output per worker.

Question 17

A country with a high level of corruption and weak enforcement of property rights is likely to experience:

Accepted Answer

Low rates of economic growth due to lack of investment incentives.

Question 18

Which of the following statements about knowledge capital is TRUE?

Accepted Answer

It is nonrival and nonexcludable, leading to increasing returns at the economy-wide level.

Question 19

Suppose Botswana, Ireland, and the United States had the following real GDP per capita in 1960: Botswana ($$500), Ireland (2$$,000), United States ($5,000). Over the next 50 years, Botswana’s growth rate is highest, followed by Ireland, then the United States. This pattern is consistent with:

Accepted Answer

The catch-up effect, where poorer countries grow faster than richer ones.

Question 20

Which of the following is a likely reason why the United States has experienced higher growth rates than many other high-income countries?

Accepted Answer

More flexible labor markets and less regulation of business.

Economic Growth, Technological Change, and Creative Destruction: Principles of Macroeconomics Study Notes

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