Economics 【Reading 14】Sample 2012, following

chunty

Which of the following most completely identifies the institutions in an economy that are necessary for markets to be effective?

A) Property rights and a supporting legal system.

B) Property rights and monetary exchange.

C) A legal system and a central banking system.

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For markets to be effective, property rights and monetary exchange are required. If property rights are properly established and enforced, people will be assured that government will not confiscate their savings and investments. Monetary exchange provides for the efficient exchange of goods and services.

JonnyKay

While having lunch with a group of friends, Francine Lenser, CFA, was overheard saying the following: “The recent boom in technological advances should keep the economy growing. Whenever the economy slows, someone will come along with a bold new idea that kick-starts it.”
Lenser’s statement most accurately reflects the:

A) exogenous growth theory.

B) new growth theory.

C) neoclassical growth theory.

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Lenser’s statement is a decent layman’s description of the new growth theory, also known as the endogenous growth theory. This theory argues that economic growth can continue indefinitely as long as technological advances are made.

JonnyKay

Which of the following concepts is uniquely associated with the neoclassical theory of economic growth?

A) Opportunity cost of having children.

B) No diminishing returns to knowledge capital.

C) Real GDP growth.

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Neoclassical economists argue that the most important economic influence on population growth is the opportunity cost to women for entering the workplace. As real wages for women rise and their job opportunities expand, the opportunity cost of staying home and raising children increases. As the opportunity cost of having children increases, birth rates decline, and population growth slows.

JonnyKay

Which of the following concepts is uniquely associated with the neoclassical theory of economic growth?

A) Opportunity cost of having children.

B) No diminishing returns to knowledge capital.

C) Real GDP growth.

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Neoclassical economists argue that the most important economic influence on population growth is the opportunity cost to women for entering the workplace. As real wages for women rise and their job opportunities expand, the opportunity cost of staying home and raising children increases. As the opportunity cost of having children increases, birth rates decline, and population growth slows.

JonnyKay

Which of the following concepts is uniquely associated with the new theory of economic growth?

A) Increased spending on health care and population growth.

B) Real gross domestic product (GDP) growth based on investment in new capital and technological change.

C) No diminishing returns to knowledge capital.

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Knowledge capital is a special type of public good because it is not subject to the law of diminishing returns. This is a key element of new growth theory. The implication is that, unlike the classical or neoclassical growth theories, economic growth is not limited.

JonnyKay

The new growth theory contends that economic growth is a function of which of the following two economic variables?

A) The subsistence real wage and real interest rates.

B) Real interest rates and technological change.

C) The creation of knowledge capital and real interest rates.

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The new growth theory holds that productivity growth is a function of society’s ability to discover new products and methods (i.e., the creation of knowledge capital), and real interest rates.

chunty

Which of the following activities provides the least significant contribution to economic growth?

A) Discovery of new technologies.

B) Increased consumer spending.

C) Savings and investment in new capital.

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Three activities are necessary to result in persistent economic growth:

• Savings and investment in new capital increase labor productivity, which is defined as real GDP per labor hour. Saving and investment in new capital increases the level of capital per worker.
• Investment in human capital is the investment in people’s skills and knowledge, leading to productivity improvements and technological advances.
• Discovery of new technologies contributes to sustained economic growth by making human capital and physical capital more productive.

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chunty

Technological progress is most extensively applied to which of the following?

A) The developments in human capital.

B) Improvements in the productivity of physical capital.

C) The creation of investment opportunities and savings incentives.

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While the most all-encompassing and powerful technologies are the development of human capital (written and spoken language, science, and mathematics) most technological progress involves improvements in the productivity of physical capital.

chunty

Which of the following is least likely to be considered necessary to sustain long-term economic growth?

A) Investment in human capital.

B) Positive population growth.

C) Discovery of new technologies.

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For economic growth to continue over the long term, societies must have incentives that encourage the pursuit of savings and investment in new capital, investment in human capital, and discovery of new technologies.

chunty

Which of the following is least likely to be observed when examining a labor productivity curve?

A) The rate of change in technology as labor increases.

B) The change in real GDP per labor hour as capital per hour changes, holding technology constant.

C) The change in real GDP per labor hour as technology changes, holding capital per labor hour constant.

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Labor productivity curves show: (1) the change if real GDP per labor hour as capital per labor hour changes, at a given state of technology, and (2) the change in real GDP per labor hour increases as the state of technology changes, at a given level of capital per labor hour. There is no way to directly observe the rate of change in technology from a labor productivity curve.