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Self-test Questions
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1

Since the industrial revolution, growth in Europe has averaged about 2% per annum except during the ‘golden age’ of growth in the 1950s and 1960s.
A)TRUE
B)FALSE
2

In the 1950s and 1960s, members of the European Economic Community grew faster, on average, than non-members.
A)TRUE
B)FALSE
3

The Solow model assumes increasing returns to scale.
A)TRUE
B)FALSE
4

The Solow model is used to determine the price of investment goods.
A)TRUE
B)FALSE
5

In the Solow model, capital is assumed to depreciate at a constant rate.
A)TRUE
B)FALSE
6

In 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.
7

In 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=gif::::/sites/dl/free/0077103947/117919/ch07q08eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (31.0K)</a>

8

The improved efficiency shows up as a shift of to , and as a shift of to .
9

In the Solow model, an increase in efficiency affects investment because the investment rate is assumed to be .
10

Before the liberalisation, the long-run equilibrium capital-labour ratio was . Afterwards it is .
11

At the points D and A, the of new capital balances the of existing capital.
12

The 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 .
13

Firms can still break even despite the drop in price since average costs and sales per firm .
Consider a situation in which two nations initially do not allow capital flows between them and then they liberalise to allow perfectly free capital flows. 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=gif::::/sites/dl/free/0077103947/117919/ch07q13eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (31.0K)</a>

14

Prior to capital market liberalisation, the rate of return to capital is in the Home nation (assume Home’s capital is measured from the left to the right in the diagram and Foreign capital is measured from the left to the right).
15

When capital flows are liberalised, capital flows from to and the new equilibrium rate of return becomes . This means a in Home’s rate and a in Foreign’s.
16

As a result of the capital inflow, Home wages should .
17

Taking the two nations together, the improved welfare due to efficiency gains is equal to the areas (use the numbers in the diagram) .





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