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Number:

Name:

Economic Growth
Dr.Trkan Turan
27.11.2008

Midterm Exam

Test A
In Part One, when finished, hand in both the answer sheet and the test booklet. For your exam to be valid,
both have to be handed in.
2. Part Two is on page A 4. Please do not use any space other than page A4 while answering.
3. The time allowed is 45 minutes.
1.

PART ONE
Consider the basic growth model, i.e. the Solow-Swan model, without technological progress for
the questions in this part.
1. The aggregate production function exhibits
a) increasing returns-to-scale
b) constant returns-to-scale
c) decreasing returns-to-scale
d) endogenous

technology.

2. F [ K (t ) , L (t) ] is a twice-differentiable function with continuous first and second order partial derivatives with
respect to its arguments. The first order partial derivatives yield _____ and _____, both are positive.
a) average product of capital ; average product of labor
b) average product of capital ; marginal product of labor
c) marginal product of capital ; marginal product of labor
d) marginal product of capital ; average product of labor
3. The second order partial derivatives are negative, which guarantees the _____ of the production function.
a) convexity
b) linearity
c) concavity
d) homogeneity
4. The positive first order partial derivatives and the negative second order partial derivatives together
determine the _________ conditions.
a) slope
b) boundary
c) homogeneity
d) Inada
5. The marginal product of capital ( labor ) goes to zero when capital ( labor ) goes to ___________.
a) a positive constant
b) a negative constant
c) zero
d) infinity
6. One of the properties of the production function states that each factor must be used in positive amounts if a positive
amount of output is to be produced, e.g. F ( 0 , L ) = F ( K , 0 ) = 0. This property is called:
a) essentiality
b) non-essentiality
c) irreversibility
d) reversibility

7. Savings in the economy are instantaneously converted into investment through the constant market clearing process
in the capital market. As a result, the economy will always have an automatic _______________ .
a) resource balance
b) resource gap
c) balanced budget
d) output balance
8. Which one of the following is not an exogenously given parameter of the model?
a) the saving rate s
c) the rate of population growth n
b) the rate of profit from investments
d) the rate of depreciation
9. Which one of the following would not be true regarding the model?
a) The rate of growth of labor is assumed to be equal to the rate of growth of population n.
b) The labor market equilibrium is given by the equation
w = f ( k ) - k . f ( k ).
c) The capital market equilibrium is given by the equation r = f ( k ).
d) The rate of net capital formation is given by the expression I / K + .

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10. The wage rate is positive throughout because:


a) the marginal product of capital is larger than the average product of capital for every k.
b) the average product of capital is larger than the marginal product of capital for every k.
c) the average product of capital is equal to the marginal product of capital for every k.
d) None of the above is necessarily true.

(n+) k
A

B
f(k)

f ( k* )

s f(k)
s. f ( k * )
C

k
k0

k*

k1

The figure above is for the next five questions.


11. The steady state equilibrium is given by point
a) O
b) A

c)

d) C

12. If the economy is in the steady state then the height of line segment [AC] measures
a) the amount of saving per worker.
c) the amount of real income per person.
b) the amount of investment per worker.
d) the amount of consumption per person.
13. If the economy is in the steady state then the height of line segment [C k*] measures
a) the amount of output per worker
c) the amount of real income per person
b) the amount of investment per worker
d) the amount of consumption per person
14. If the economy is in the steady state then the average product of capital will be equal to:
a) C k* / O k*
b) A k* / O k*
c) B k1 / O k1
d) OB / BC
15. Suppose that the economy sets off with an initial capital-labor ratio like k0. Then which of the following would not
be true about such a starting position?
a) The amount of saving is less than the amount of replacement investment.
b) The amount of gross investment is greater than the amount of replacement investment.
c) The amount of saving per person is greater than the amount of replacement investment per person.
d) The amount of gross investment per person is greater than the amount of replacement investment per person.

16. Recall the models fundamental equation of motion, k = s f ( k ) - ( n + ) k . The second part of the righthand side, ( n + ) k , yields:
a) the amount of new investment per worker required to keep the amount of capital per worker constant.
b) the amount of new investment per worker required to keep the amount of capital per worker increasing.
c) the amount of new investment per worker required to keep the amount of capital per worker decreasing.
d) None of the above is necessarily true.
17. Recall the capital accumulation equation
a) the rate of change of capital stock.
b) the growth rate of capital stock.

k = s f ( k ) - ( n + ) k . The left-hand side, k , is:


c) the rate of change of capital per worker.
d) the growth rate of capital per worker.

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18. When k is positive, i.e. the capital per worker is _________, then we say that ___________________ is occurring
in the economy.
a) increasing , capital widening
c) increasing , capital deepening
b) decreasing , capital ducumulation
d) decreasing , capital deepening
19. Capital decumulation occurs in the economy when
a) s f ( k ) > ( n + ) k.
c) s f ( k ) < ( n + ) k.
b) s f ( k ) = ( n + ) k .
d) s f ( k ) / k > n + .
20. Which of the following does best represent what is happening to growth rates in the steady state?
a) kyc nand KYC n
b) k yc n
and KY C 0
c) k yc 0 and KYC 0
d) k yc 0and KY C n
21. Which of the following does best represent what is happening to growth rates during the transition to the steady state
for an economy experiencing capital decumulation?
a) k0y0and Kn Y n
b) k0y0and K 0 Y 0
c) k0y0and K n Y n
d) k0 y0and K n Y n
22. Suppose the parameters of the basic model take on the following values: A = 1, s = 0.20, n = 0.01,
= 0.04, and = 1 / 3. Then what will be the level of consumption per capita, c *, in the steady state?
a) 0.16
b) 1.6
c) 16
d) 160
23. Consider the comparative statics of the basic model. Which of the following can be asserted to be true?
a) The higher the saving rate the smaller the steady state level of k.
b) The higher the growth rate of labor the larger the steady state level of k.
c) The higher the labor elasticity of output the larger the steady state level of k.
d) The higher the rate of depreciation of capital the smaller the steady state level of k.
Consider the golden rule of accumulation within the context of the basic model and answer the next two questions.
24. Which of the following would not be true for the relationship between the size of the saving rate s and the steady
state level of consumption per capita c* ?
a) For the lower range of k , the higher s the larger c *.
b) For the lower range of k , the lower s the smaller c *.
c) For the larger range of k , the higher s the larger c *.
d) For the larger range of k , the lower s the larger c *.
25. An economy is said to be operating on its golden path, among the alternative steady states, whenever
a) the average product of capital is just large enough to satisfy the need for replacement investment.
b) the marginal product of capital is just large enough to satisfy the need for replacement investment.
c) the net capital formation can just offset the loss in the capital stock due to wear-and-tear.
d) It is not always possible to raise the saving rate up to a desirable level.

ANSWER SHEET
1

11

16

21

12

17

22

13

18

23

14

19

24

10

15

20

25

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PART TWO

The below figure shows the transitional dynamics of the economic system within the context of the basic model
with technological progress. (i) Suppose that the economy starts off from an initial level of capital-labor ratio k2 .
Describe fully the behavior of the system along the transition path to the steady state. (ii) Suppose that the system
operates on its long-run growth path. If, for some reason, it departs from its path and, as a result, the effective capitallabor ratio falls below its steady state value, from
state?

k * to

k1 , will there be any chances for it to return the steady

[ Please work on, and make use of, the figure. ]

(i)

n + xn++

s. f ( k )
k

(ii)

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