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Self-test questions
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1Since the industrial revolution, growth in Europe has averaged about 2 per cent per annum except during the ‘golden age’ of growth in the 1950s and 1960s.
A)True
B)False



2In the 1950s and 1960s, members of the European Economic Community grew faster, on average, than non-members.
A)True
B)False



3The Solow model assumes increasing returns to scale.
A)True
B)False



4The Solow model explains how the EU's long-run growth rate could be affected by European integration
A)True
B)False



5The Solow model assumes that a constant fraction of the economy's GDP is invested.
A)True
B)False



6In the Solow model:
A)all long run growth is driven by physical capital accumulation.
B)medium run growth is affected by physical capital accumulation, but long-run growth is determined by technological progress.
C)investment is assumed to be financed by borrowing abroad.
D)the main equilibrating variable is the investment rate.



7In the Solow model, the GDP/L curve is concave since:
A)the rate of depreciation is assumed to be constant.
B)the rate of depreciation and the investment rate are assumed to be constant.
C)the marginal return to additional capital falls as the capital-labour ratio rises.
D)the population is constant.
Consider a situation in which European integration leads to an increase in efficiency, so that more output can be produced from the same amount of capital and labour. Use the diagram to answer the questions; in particular refer to the labels in the diagram. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::Fig 7.1::/sites/dl/free/0077169654/677596/Chap7.JPG','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif">Fig 7.1 (95.0K)</a>Fig 7.1




8The improved efficiency shows up as a shift of to , and as a shift of to .



9In the Solow model, an increase in efficiency affects investment because the investment rate is assumed to be .



10Before the liberalization, the long-run equilibrium capital-labour ratio was . Afterwards it is .



11At the points D and A, the of new capital balances the of existing capital.



12The impact of the efficiency gain on GDP per capita is shown by the number and the impact of the induced capital formation is shown by the number .



13Firms can still break even despite the drop in price since average costs and sales per firm .



14Only one of the following indicators is not correct as a ‘footprint’ of how integration may raise a nation’s steady state capital stock:
A)Stock market prices should increase.
B)Interest rates fall.
C)The aggregate investment to GDP ratio should rise.
D)The net direct investment figures should improve.



15European integration may also raise the investment rate by making investment less risky. The end result is a higher capital stock and a higher output per worker.
A)True
B)False

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::Baldwin_Figure_7.9::/sites/dl/free/0077169654/1063945/baL69654_0709.gif','popWin', 'width=900,height=570,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif">Baldwin_Figure_7.9 (32.0K)</a>Baldwin_Figure_7.9

Consider the diagram above reproducing Figure 7.9.




16The arrows on the GDP/L line, the s(GDP/L) line and the δ(K/L) line show that as K/L rises forever, the output per worker will rise forever, along with the amount of new knowledge created and the amount of new knowledge that depreciates.
A)True
B)False



17Consider Figure 7.9 again. The further s(GDP/L) is above δ(K/L), the smaller is the annual net addition to K/L. Thus as s rises, the nation will accumulate knowledge capital with a reduced pace, and thus its income will rise at a reduced pace.
A)True
B)False



18In Figure 7.9, the investment rate exceeds the depreciation rate at all levels of K/L. For example, at a moment in time when the K/L ratio equals K/L*, the amount of new knowledge capital per worker that is created is given by point A, while the amount of knowledge per worker that becomes obsolete is B. knowledge capital stock rises.
A)True
B)False







Author OLCOnline Learning Center

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