Question

- Compared with its fast growth today, is China’s economy likely to grow more quickly or more slowly in the future? Explain using the Solow Growth Model and the concept of Catching Up Growth.

8. At an annual growth rate of 0.7%, approximately how long does it take for real GDP per capita to increase from $30,000 to $60,000 in a country?

A) 50 years B) 100 years C) 200 years D) 400 years

12. Good institutions tend to:

A) decrease the rate of investment. B) leave the rate of investment unchanged. C) increase the rate of investment. D) have an ambiguous effect on investment.

20. Crowding out occurs because the government increases the demand for loanable funds, drives up interest rates, and causes:

A) saving to rise. B) saving to fall. C) consumption and private investment to rise. D) consumption and private investment to fall.

- What are the five institutions that encourage investment? Explain how these “good institutions” enhance the incentives for entrepreneurship and leads to increases in economic growth.

Answer 1

According to the Solow growth model, the Economy of China will achieve the steady state, where the growth rate will converge. Today, the country of China has one of the highest growth rate in the world and for the sake of convergence as suggested by Solow growth model, the growth rate of China will grow slowly in the future or in the long run to achieve the steady state growth rate.

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8.

B

Working note:

number of years = log2/log1.007 = 99.37 or 100 years approx.

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12.

C

Rate of investment is going to increase.

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20.

D

Due to increase in interest rates, the households and firms are discouraged. It causes consumption and investment to decrease.