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 small annual increases to accumulate into large total increases over decades.

Question 2

According to the economic growth model, which factor is most directly responsible for long-run increases in real GDP per capita?

Accepted Answer

Labor productivity, which depends on capital per hour worked and the level of technology.

Question 3

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, which country will have a higher standard of living, and why?

Accepted Answer

Country A, because compounding at a higher rate leads to a much larger increase in GDP per capita.

Question 4

Which of the following is an example of creative destruction as described by Joseph Schumpeter?

Accepted Answer

The rise of streaming services like Netflix leading to the decline of video rental stores like Blockbuster.

Question 5

What is the primary reason the Industrial Revolution began in England according to Douglass North?

Accepted Answer

Political changes after the Glorious Revolution established secure property rights and an independent court system.

Question 6

Which of the following best describes the concept of diminishing returns to capital?

Accepted Answer

Each additional unit of capital increases output by a smaller amount than the previous unit.

Question 7

If a country is already highly capitalized, what is the most effective way to increase output per hour worked in the long run?

Accepted Answer

Promote technological change.

Question 8

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

Accepted Answer

Increasing the population size.

Question 9

Why does knowledge capital result in increasing returns at the economy level?

Accepted Answer

Because knowledge capital is nonrival and nonexcludable.

Question 10

Which government policy is most likely to encourage the creation of knowledge capital?

Accepted Answer

Granting patents and copyrights to protect intellectual property.

Question 11

Suppose a country’s real GDP is growing at 2% per year while its population is growing at 3% per year. What happens to its standard of living?

Accepted Answer

The standard of living is falling.

Question 12

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

Accepted Answer

An American Airlines builds a hub in China.

Question 13

According to the catch-up effect predicted by the economic growth model, what should happen to the growth rates of poor countries compared to rich countries?

Accepted Answer

Poor countries should grow faster than rich countries.

Question 14

Which of the following is a key reason why some low-income countries experience slow economic growth?

Accepted Answer

Weak institutions, such as lack of property rights and rule of law.

Question 15

If a country wants to prevent 'brain drain,' which policy should it prioritize?

Accepted Answer

Investing in health and education to improve domestic opportunities.

Question 16

Which of the following best describes the role of entrepreneurs in Schumpeter’s model of economic growth?

Accepted Answer

Entrepreneurs drive creative destruction by introducing new technologies and organizing production in innovative ways.

Question 17

Why did the Soviet Union experience slower long-run economic growth despite initial rapid increases in output per worker?

Accepted Answer

Managers had little incentive to innovate due to lack of competition.

Question 18

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

Accepted Answer

Strengthening property rights and the rule of law.

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 GDP per capita grew the fastest, followed by Ireland, then the United States. Which economic concept does this illustrate?

Accepted Answer

Catch-up effect.

Question 20

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

Accepted Answer

The United States has a relatively efficient financial system and flexible labor markets.

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

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