Q: Suppose Country A has a real GDP per capita of $$10,000 and grows at 2% per year, while Country B has a real GDP per capita of 10$$,000 and grows at 1% per year. After 50 years, approximately what will be the real GDP per capita of Country A?

$$10,000 \times (1 + 0.02$$)^{50}$$ = 26$$,532

Question 1

Which of the following best explains why small differences in annual economic growth rates can lead to large differences in living standards over time?

Accepted Answer

Because compounding causes even small annual growth rates to accumulate into large increases in real GDP per capita over long periods.

Question 2

Suppose Country A has a real GDP per capita of $$10,000 and grows at 2% per year, while Country B has a real GDP per capita of 10$$,000 and grows at 1% per year. After 50 years, approximately what will be the real GDP per capita of Country A?

Accepted Answer

$$10,000 	imes (1 + 0.02$$)^{50}$$ = 26$$,532

Question 3

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

Accepted Answer

Increases in the quantity of capital per hour worked

Question 4

According to the per-worker production function, what happens as more capital is added per hour worked, holding technology constant?

Accepted Answer

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

Question 5

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The process by which new products and technologies replace outdated ones, leading to economic growth.

Question 6

Why is knowledge capital considered to have increasing returns at the economy-wide level?

Accepted Answer

Because knowledge capital is nonrival and nonexcludable, so its benefits can be shared widely.

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’s real GDP is growing at 3% per year, while its population is growing at 4% per year. What is happening to real GDP per capita?

Accepted Answer

It is decreasing by 1% per year.

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

According to the catch-up effect predicted by the economic growth model, which of the following statements is most accurate?

Accepted Answer

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

Question 11

Which of the following is a reason why some low-income countries have failed to achieve rapid economic growth?

Accepted Answer

Frequent civil wars and political instability

Question 12

If a country moves from point A to point B on its per-worker production function, increasing capital per hour worked but holding technology constant, what does this movement represent?

Accepted Answer

An increase in output per hour worked due to more capital, with diminishing returns

Question 13

Which of the following best explains why the Soviet Union experienced slower long-term economic growth despite initial rapid increases in output per worker?

Accepted Answer

Managers had little incentive to innovate or improve efficiency due to lack of competition.

Question 14

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

Accepted Answer

Real GDP per capita

Question 15

If a country wants to encourage technological change, which policy would be most effective?

Accepted Answer

Granting patents and copyrights to protect intellectual property

Question 16

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. Which economic concept does this pattern illustrate?

Accepted Answer

Catch-up effect

Question 17

Which of the following is a plausible reason why high-income countries like the United States have not been caught up to by other high-income countries?

Accepted Answer

The U.S. has a relatively flexible labor market and efficient financial system.

Question 18

Which of the following is a likely effect of globalization on low-income countries?

Accepted Answer

It increases access to foreign capital and can help countries escape the vicious cycle of low savings and investment.

Question 19

If a country’s government is corrupt and property rights are not protected, what is the most likely impact on economic growth?

Accepted Answer

Investment and technological progress will be discouraged, leading to slower growth.

Question 20

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

Accepted Answer

Technological change can increase output per hour worked without the same diminishing returns as capital accumulation.

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

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