Chapter Nine - Nancy E. Bertaux, Professor of Economics ...



THE CLASSICAL LONG-RUN POLICY MODEL: GROWTH AND SUPPLY-SIDE POLICIES PROBLEM SETNAME: _______________________________________DATE: ____ / ____ / ____Give the best answer to each of the following questions.1. Using the rule of 72, answer the following questions:a. In how many years will it take income to double if it is rising each year by 1 percent? 2 percent? 4 percent?b. Which country would have higher income in 36 years: country A that begins with income of $3,000, increasing at an annual rate of 4 percent a year or country B that begins with income of $6,000, increasing at an annual rate of 2 percent a year? What about in 72 years?c. A country’s income begins at $10,000 and rises to $20,000 in 18 years. What is the approximate annual rate of increase for income?2. Fill in the blanks in the statements below.a.If the rate of real GDP growth is 3.5 percent and the rate of population growth is 1.2 percent, then the growth rate of real GDP per capita will be equal to _____ percent.b.If the rate of real GDP growth is 3.2 percent and the rate of population growth is _____ percent, then the growth rate of real GDP per capita will be equal to 2.2 percent.c.If the rate of real GDP growth is _____ percent and the rate of population growth is 1.5 percent, then the growth rate of real GDP per capita will be equal to 2.5 percent.3. Explain the two reasons that new growth theory treats investment in capital and investment in technology differently. 4. In the diagram below, draw a graph that relates output to the amount of capital and reflects the law of diminishing marginal productivity discussed in the textbook.5. Parts a – c below give the incomes of five people in a hypothetical economy. For each of these, calculate the mean level of income and the median level of income. Then answer the question in part d.a.$30,000; $40,000; $50,000; $100,000; $110,000b.$30,000; $40,000; $50,000; $120,000; $140,000c.$40,000; $50,000; $60,000; $110,000; $120,000d.Why is median income a more meaningful measure than mean income?6. List five policies that encourage growth. Answers to the Problem SetThe following are the correct answers to the problem set that follows on the next two pages, along with the learning objective associated with each question. The problem set is designed to be photocopied directly from this book and distributed for student use.1. (LO1)a. 72 years, 36 years, 18 years.b. Both countries will have the same income ($12,000) in 36 years. Country A will have a higher income in 72 years, when Country A’s income will be $48,000 and Country B’s income will be $24,000.c. 4 percent.2. (LO3)a. 2.3b. 1c. 43. (LO4)First, increases in technology can be the result of good luck or good timing, and are not as directly linked to investments as is an increase in capital. Second, increases in technology tend to have enormous positive externalities because ideas, unlike machines, can be used by many people at the same time once they are developed.4. (LO4)The law of diminishing marginal productivity states that as more and more of a variable input is added to an existing fixed input, eventually the additional output produced with that additional input falls. The diagram should be positively-sloped, but that slope should decrease as capital is added, similar to the one below.5. (LO2)a.Mean: $66,000; median: $50,000.b.Mean: $76,000; median: $50,000.c.Mean: $76,000; median: $60,000.d. The median level of income partially takes into account the distribution. If there is economic growth, but that growth only goes to those already earning more than the median (which is what happened between parts a and c above) then the median does not change.6. (LO3, LO4)Five policies that encourage growth might be: policies that encourage saving and investment, such as well-defined property rights; policies to increase the level of education, such as free public schools; policies to create institutions that encourage technological innovation, such as patents; policies that provide funding for basic research, such as university funding; policies to increase the economy’s openness to trade, such as the reduction of tariffs. ................
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