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Department of Economics
Economic Growth and Economic Development I
Instructor: Prof. Dr. Alexi Danchev
Test on Solow model.
Registration No. Name of the students
Group Time allowed one academic hours.
Maximum scores = 40.
Answer all questions. All questions carry equal marks. There are no penalties for
incorrect answers. For each question, circle the appropriate letter. Do not circle more than
one letter. If you wish to change your answer, clearly cross out your first selection.
Ambiguous or unclear responses will be regarded as incorrect answers.
1 TRUE FALSE Per capita output is an increasing function of the capital-labour ratio and is
subject to diminishing marginal productivity of capital.
2 TRUE FALSE The rate of per capita capital accumulation that maintains a constant capital-
labour ratio is normally shown as the ray having a slope equal to the growth
rate of the population
3 TRUE FALSE If the savings rate rises from (1 - bo) to (1 - bl) the savings function shifts
downwards.
4 TRUE FALSE The level of the capital/labour ratio at which the growth rates of capital and
labour are equal is called the steady-state
5 TRUE FALSE Solow—Swan model has a great defect as an explanation of economic growth
in the real world because in the model, there is no growth of output per worker
in the very long run (the steady state);
1. Which of the following countries had the fastest rate of economic growth since 1950s
a. United States
b. United Kingdom
c. Germany
d. Japan
e. Turkey
3. When an equal percentage increase in the factors of production raises real GNP
by
the same percentage, the production function has the characteristic known as
a. constant returns to scale
b. constant marginal productivity
c. diminishing marginal productivity
d. increasing returns to scale
e. decreasing returns to scale.
6. Suppose that the government passes a law requiring households to increase savings
10% above previous levels. According to Solow’s growth theory, in the short run
a. output per capita grows more rapidly
b. output per capita grows at the constant steady state rate, n
C. output per capita stays constant
D. all of the above
e. none of the above
7. Suppose that the U.S. adopted a new immigration policy with respect to Eastern
Europe, which allowed all highly skilled Eastern Europeans who so desired to
immigrate to the U.S. Preliminary studies indicate that the majority of immigrants
would be doctors, computer programmers, scientists and economists. In the short
run we would expect
a. the GNP per capita to rise as the production function shifts upward
b. the GNP per capita to fall even though total production increases
c. the GNP per capita to rise as the production function shifts downward
d. none of the above are correct
Figure 12-1
OUTPUT PER HEAD
H I
B C P
0
Q/N = AoF(K/N)
E F
8. Initially, the economy is at point B on Figure 12-1. According to the Solow growth
model, an increase in the output per capita without an increase in capital per
worker is represented by and could be the result of
______
9. Initially, the economy is at point B on Figure 12-1. According to the Solow model
of growth, in the short run, the discovery of a cold fusion process which reduces
the cost of energy by 50%, ceteris paribus, will shift the economy from _____
2. Why was the Harrod-Domar model of economic growth incomplete and how did Solow
improve upon it in his theory of economic growth?
Correct answers:
Section I. TRUE / FALSE QUESTIONS.
1 2 3 4 5
TRUE TRUE FALSE TRUE TRUE
S = (∆K/K + d) K.
Secondly, the steady state condition that the growth rate of capital stock must equal
the population growth rate (k = n) was incorporated to develop the theoretical steady
state condition that the saving per unit of capital equals the sum of the population
growth rate and the depreciation rate:
SQ/K = n + d. K
However, this model was said to have “knife-edge stability” in that there was no
equilibrating forces which guided the seemingly independent factors to be consistent
with the steady state condition. Solow solved this problem by incorporating the per-
person production function into the model:
SQ/N = (n + d) . K/N
and recognizing that when (K/N) is growing faster than (Q/N), the need for workers
and depreciation capital is in excess of total saving, so that (K/N) will eventually fall
until ∆(K/N) = 0 and the steady state condition is satisfied. Thus, the important aspect
that the production function added was the property of diminishing returns
to the capital-labor ratio.