Question

20. If a country's depreciation rate increased from 2 percent to 5 percent of physical capital and it was operating at its steady-state before the change, we would expect to see which of the following?

I. a decrease in the steady-state per capita capital stock

II. a decrease in the steady-state level of real GDP per capita

III. a corresponding decrease in real population growth rate

IV. an increase in capital stock

A) All the above are correct.

B) I, II and III are correct.

C) I and II are correct

D) II and IV only are correct

E) III and IV are correct

21. Of the ideas we discussed for sustainable, long-run growth in an economy, which of the following are true? (circle all possible choices).

1. The net present value of future investment must align with today’s depreciation rates.
2. Renewed focus on R&D investment and innovation can lead to a permanent change in long-run growth trajectory.
3. Large physical capital donations from wealthy allies (military equipment, direct financial aide, cash gifts) lead to permanent changes in long-run growth trajectory.
4. Strengthening property rights and incentives for capital investment leads to permanent changes in long-run growth trajectory.

22. If a natural disaster occurs and destroys 50% of physical capital in an economy, which of the following are most likely true? Assume nothing changes about f(k), A, n, d, or s; and circle all possible choices.

1. Steady state levels of physical capital (k_ss) and output (y_ss) will fall.
2. Steady state levels of physical capital (k_ss) and output (y_ss) will remain unchanged.
3. Increasing the capital stock by one unit (after the event) will have a larger effect on output than it would have before the event.
4. Steady state levels of physical capital (k_ss) and out (y_ss) will rise.

Answer 1

20.

B

If a country’s depreciation rate is increases there would be an overall decrease in the following

• steady-state per capita capital stock
• steady-state level of real GDP per capita
• real population growth rate

21

• Renewed focus on R&D investment and innovation can lead to a permanent change in long-run growth trajectory.
• Large physical capital donations from wealthy allies (military equipment, direct financial aide, cash gifts) lead to permanent changes in long-run growth trajectory.
• Strengthening property rights and incentives for capital investment leads to permanent changes in long-run growth trajectory.

22

• Steady state levels of physical capital (k_ss) and output (y_ss) will fall.
• Increasing the capital stock by one unit (after the event) will have a larger effect on output than it would have before the event.