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Macroeconomics (Acemoglu/Laibson/List)
Chapter 6 Aggregate Incomes
6.1 Inequality Around the World
1) Income per capita is ________.
A) gross domestic product divided by total unit of all goods produced
B) gross domestic product divided by total population
C) gross domestic product divided by total labor force
D) gross domestic product divided by total amount of capital used
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
2) The gross domestic product of a small country which has a population of 200,000 is
$56,000,000. The income per capita of the country is ________.
A) $50
B) $100
C) $200
D) $280
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
3) The income per capita of a country with a population of 50,000 is $4,500. Its gross domestic
product is ________.
A) $54,500
B) $900,000
C) $120,000,000
D) $225,000,000
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
4) If the aggregate income of an island country is $8 million and income per capita is $5,000, the
total population of the island is ________.
A) 1,600
B) 20,000
C) 40,000
D) 106,000
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
1
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5) The population of Potentia doubled within 20 years while its income per capita remained
unchanged during the same period of time. This implies that ________.
A) its gross domestic product also doubled
B) its price level halved
C) its gross domestic product remained constant
D) its price level doubled
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
6) Which of the following will happen if the GDP of a country increases and the population
remains constant?
A) Income per capita will remain constant.
B) Gross national product will decrease.
C) Income per capita will increase.
D) Unemployment rate will increase.
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
7) If the population of a country increases, while GDP remaining constant, then ________.
A) income per capita will remain unchanged
B) income per capita will decrease
C) trade deficit will decrease
D) gross national product will increase
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
8) The GDP of Country X and Country Y were found to be equal in a particular year. However,
the income per capita of Country X was higher than the income per capita of Country Y. This
implies that ________.
A) the population of Country X is higher than the population of Country Y
B) the population of Country X is lower than the population of Country Y
C) the number of workers in country X is higher than the number of workers in Country Y
D) the number of workers in country X is lower than the number of workers in Country Y
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
2
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9) Two countries have equal population. These countries will have equal income per capita in a
particular year if ________.
A) the GDP of both the countries are equal in that year
B) the countries have equal inflation rate in that year
C) equal amounts of capital are available in both the countries in that year
D) the size of the working age population in both the countries are equal in that year
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
10) The average income per capita of a country in its own currency is 75,000 units. If one US
dollar is worth 20 units of its currency, the income per capita of the country in dollars is
________.
A) $1,850
B) $2,500
C) $3,750
D) $15,000
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
11) If the income per capita of United Kingdom is £23,800 and dollar/pound exchange rate
(US$/£) is 1.68 in 2014, the income per capita of UK in US dollars in the same year is ________.
A) $12,812
B) $22,829
C) $30,400
D) $39,984
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
12) Japan's currency is called Yen. The value of Japan's income per capita in dollars is high if
________.
A) the dollar/yen exchange rate is high
B) the dollar/yen exchange rate is low
C) the income per capita of the U.S. is high
D) the value of Japan's income per capita in yen is low
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
3
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13) Which of the following will lead to a decrease in the value of Spanish income per capita in
dollars?
A) An increase in the dollar/euro exchange rate
B) A decrease in the dollar/euro exchange rate
C) A decrease in the income per capita of U.S.
D) An increase in the value of the Spanish income per capita in Euro
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
14) Which of the following tools is used to compare the income per capita across countries?
A) Production possibilities frontier
B) Purchasing power parity
C) The headcount index
D) The GDP deflator
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
15) A bundle of goods that costs $1 in the U.S. is worth 5 units in Country A's currency. If
Country A's GDP in its own currency is 5,000,000 units, Country A's GDP in purchasing power
parity-adjusted dollars is ________.
A) $1,000,000
B) $2,500,000
C) $3,000,000
D) $50,000,000
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
16) The income per capita in Genovia is 38,333 Genovian dollars. If 1 Genovian dollar is equal
to 0.78 U.S. dollars, the income per capita in Genovia in U.S. dollars, is ________
A) $3,563
B) $29,899.74
C) $30,000
D) $49,144.87
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
4
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17) The income per capita in Baltonia is 64,163 in Baltonian currency. If the price of a basket of
goods worth $1 in the U.S. is 5.50 units of Baltonian currency, Baltonia's income per capita in
purchasing power parity is:
A) $11,666.
B) $2,832.
C) $10,257.48.
D) $15,624.50.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
The price of a given basket of goods in Country 1 is 10 karls. The price of the same basket of
goods in Country 2 is 25 ritz and $2 in the U.S. Country 1 has a income per capita of 3,200 karls
and Country 2 has a income per capita of 5,500 ritz.
18) Refer to the scenario above. The price of a basket of goods worth $1 in the U.S. is ________
in Country 1.
A) 5 karls
B) 20 karls
C) 25 karls
D) 50 karls
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
19) Refer to the scenario above. A basket of goods worth $1 in the U.S. has a price of ________
in Country 2.
A) 12.5 ritz
B) 25 ritz
C) 50 ritz
D) 320 ritz
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
5
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20) Refer to the scenario above. Which of the following is true?
A) The purchasing power parity-adjusted income per capita of Country 1 is $3,500.
B) The purchasing power parity-adjusted income per capita of Country 2 is $5,800.
C) The purchasing power parity-adjusted income per capita of Country 1 is higher than that of
Country 2.
D) The purchasing power parity-adjusted income per capita of Country 1 is lower than that of
Country 2.
Answer: C
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
21) Suppose the price of an iPad is $500 in the U.S, and 30,000 rupees in India. If an iPad is
representative of average prices within a country, then the price of a basket of goods worth $1 in
the U.S. costs ________.
A) 0.17 rupees in India
B) 2 rupees in India
C) 60 rupees in India.
D) 100 rupees in India
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
22) The price of a given basket of goods in Richland is 75 ritz. If the same basket of goods cost
$10 in the U.S., the price of a basket of goods worth $1 in the U.S. is ________.
A) 0.13 ritz
B) 7.5 ritz
C) 1 ritz
D) 1.5 ritz
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
23) Which of the following is true?
A) Exchange rate-based measures of income per capita are identical to PPP-based measures.
B) Exchange rate-based measures of income per capita differ from PPP-based measures of
income per capita.
C) The gap between the income per capita of U.S and the income per capita of poorer countries
is large when PPP-based measures are used.
D) The gap between the income per capita of U.S and the income per capita of poorer countries
is small when exchange rate-based measures are used.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
6
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24) Which of the following should be used to compare the incomes of countries with huge
differences in cost of living?
A) Gross national product
B) Income per working age population
C) Exchange rate-based measure of income per capita
D) PPP-based measure of income per capita
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
25) Which of the following is an alternative measure of exchange rate proposed by The
Economist magazine?
A) The Big Mac Index
B) The Consumer Price Index
C) The GDP deflator
D) The midcap index
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: The Big Mac Index
26) An international agency uses the prices of iPads in different countries to compute the
exchange rate between the currencies of these countries. Which of the following measures is
based on a similar idea?
A) The Big Mac Index
B) The GDP deflator
C) The midcap index
D) The Human Development Index
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: The Big Mac Index
7
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The price of an iPhone 5s in the U.S. is $399. The table below lists the income per capita and
prices of the same iPhone in four different countries in 2014 in their own currencies.
27) Refer to the scenario above. What is the purchasing power parity-based exchange rate
between the two currencies?
A) 2.5 units of Country 1's currency for $1
B) 0.4 units of Country 1's currency for $1
C) 1 unit of Country 1's currency for $2.50
D) 1.2 units of Country 1's currency for $1
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
28) Refer to the scenario above. The income per capita of Country 2 in PPP-adjusted dollars is
________.
A) $5,985
B) $6,834
C) $12,655
D) $4,236
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
29) Refer to the scenario above. Which country has the highest income per capita in PPP dollars?
A) Country 1
B) Country 2
C) Country 3
D) Country 4
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
8
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30) Refer to the scenario above. Which country has the lowest income per capita in PPP-adjusted
dollars?
A) Country 1
B) Country 2
C) Country 3
D) Country 4
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
31) Which of the following should be used to compare the incomes of countries with equal
population but different unemployment rates?
A) Gross national product
B) Income per worker
C) Exchange rate-based measure of income per capita
D) PPP-based measure of income per capita
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Income Per Worker
32) The income per capita of two neighboring countries for a particular year were equal.
However, Country 1 had a higher income per worker than Country 2. Which of the following is
likely to be true?
A) The number of retired people is higher in Country 2 than in Country 1.
B) The number of children aged below 15 is higher in Country 2 than in Country 1.
C) The number of people employed is higher in Country 2 than in Country 1.
D) The number of people unemployed is lower in Country 1 than in Country 2.
Answer: C
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Income Per Worker
9
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33) The GDP of 4 countries in a continent were found to be equal. However, the number of
people employed in each country is shown in the table below:
Which country has the highest income per worker?
A) Country 1
B) Country 2
C) Country 3
D) Country 4
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Income Per Worker
34) The gross domestic product of a small country is $4,150,000 and the size of its employed
labor force is 5,000. The income per worker of the country is ________.
A) $213
B) $445
C) $620
D) $830
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Income Per Worker
35) The gross domestic product of a country is $500,000. If its income per worker of the
population is $100, the size of its employed labor force is ________.
A) 200
B) 2,500
C) 5,000
D) 8,000
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Income Per Worker
10
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36) If the number of workers in a country is 12,000 and its income per worker is $380, its gross
domestic product is ________.
A) $1,240,000
B) $4,560,000
C) $524,000
D) $618,000
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Income Per Worker
37) The income per worker of a country increases if ________.
A) the country's GDP increases, all other variables remaining constant
B) the country's GDP falls, all other variables remaining constant
C) the number of children in the country aged below 15 increases
D) the number of retired people in the country increases
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Income Per Worker
38) In Lutheria, there are 10,000 people in the age group of 0-14, 30,000 people are employed,
and 2,000 people are unemployed. Lutheria's GDP, measured in luthers, is 1 billion. Income per
worker in Lutheria is:
A) 10,000 luthers.
B) 23,667 luthers.
C) 28,999 luthers.
D) 33,333 luthers.
Answer: D
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Income Per Worker
39) If a country's GDP increases and all other variables remains constant, ________.
A) its GNP will fall
B) its trade surplus will increase
C) its income per capita will fall
D) its income per worker will increase
Answer: D
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Income Per Worker
11
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40) The number of people employed in a country increased. Everything else remaining
unchanged, this will lead to a ________.
A) fall in the country's GDP
B) fall in the country's GNP
C) fall in the country's consumer price index
D) fall in the country's income per worker
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Income Per Worker
41) Which of the following is true?
A) The income per worker of a country is lower than its income per capita.
B) The income per worker of a country is higher than its income per capita.
C) The income per worker of a country increases when the amount of capital available in the
country diminishes.
D) The income per capita of a country increases when there is an increase in the number of
workers.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
42) The main reason why income per capita and income per worker varies across countries is
because ________.
A) prices vary across countries
B) productivity varies across countries
C) currencies vary across countries
D) interest rates vary across countries
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Productivity
43) A country's unemployment rate fell from 6% to 5% during a year. If its total population,
capital stock and output remain unchanged, ________.
A) its income per capita will fall
B) its income per worker will fall
C) its income per capita will increase
D) its income per worker will increase
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Productivity
12
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44) Which of the following is a better measure of the productivity of employed people in a
country?
A) Income per capita
B) Income per worker
C) Gross Domestic Product
D) Gross National Product
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Productivity
45) Country A's income per capita is higher than that of Country B. Country A is likely to have
________.
A) a higher unemployment rate
B) a higher life expectancy at birth
C) a lower life expectancy at birth
D) a higher exchange rate
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Incomes and the Standard of Living
46) The Human Development Index combines ________, life expectancy, and measures of
education to measure the standard of living.
A) income per worker
B) income per capita
C) gross domestic product
D) gross national product
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Incomes and the Standard of Living
47) Countries with higher income per capita are likely to have ________.
A) a lower Human Development Index
B) a higher Human Development Index
C) a lower life expectancy at birth
D) a higher rate of unemployment
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Incomes and the Standard of Living
13
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The following table shows the gross domestic product and total population in a particular year.
48) Refer to the scenario above. The income per capita of Neoland is ________.
A) $1,200
B) $1,000
C) $1,500
D) $7,200
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
49) Refer to the scenario above. Which country has the highest income per capita?
A) Ritzland
B) Neoland
C) Techland
D) Eduland
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
50) Refer to the scenario above. Which country has the lowest income per capita?
A) Ritzland
B) Neoland
C) Techland
D) Eduland
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
14
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51) Refer to the scenario above. Which country is likely to have the highest Human
Development Index?
A) Ritzland
B) Neoland
C) Techland
D) Eduland
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Incomes and the Standard of Living
52) Refer to the scenario above. Which country is likely to have the highest rate of poverty?
A) Ritzland
B) Neoland
C) Techland
D) Eduland
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Incomes and the Standard of Living
53) Refer to the scenario above. Which country is likely to have lowest life expectancy at birth?
A) Ritzland
B) Techland
C) Neoland
D) Eduland
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Incomes and the Standard of Living
54) What is the limitation of using exchange rate-based measures as indicators of the standard of
living across countries?
Answer: Exchange rates convert currencies into the same units but fail to account for the fact
that the prices of many goods and services differ across countries. Fluctuations in exchange rates
have little to do with changes in prices in different countries and are unable to account for the
differences in cost of living. Therefore, if exchange rates are used to compare the income per
capita of different countries, there is a possibility that the income per capita of a country will be
overestimated.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
15
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55) Explain the concept of purchasing power parity.
Answer: The purchasing power parity framework is used to convert aggregate incomes into
common units. The idea here is to adjust aggregate incomes so that a dollar can purchase the
same bundle of commodities in any country. To perform this adjustment, we choose a
representative bundle of commodities and calculate what it costs in different countries. Then,
using the cost of the bundle in each country relative to its cost in the United States, we obtain a
measure of each country's aggregate income in PPP-adjusted U.S. dollars.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Measuring Differences in Income per Capita
56) What is the main shortcoming of the Big Mac Index?
Answer: The Big Mac index is a simple example of a purchasing power parity adjustment. Its
shortcoming is that instead of a bundle of diverse goods, this index only compares a bundle
consisting of a single good, the Big Mac, which is only a small fraction of people's consumption.
Thus, its price will not reflect true cost of living differences across countries.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: The Big Mac Index
57) The gross domestic product of Neonland is 450,000 neons. It has a total population of 1,500.
30% of the total population in Neonland comprises of retired workers, 50% of the population is
employed, and the remaining are unemployed children.
i) Calculate the income per capita of Neonland.
ii) What is the income per worker of Neonland?
iii) Is there a difference between the two measures? If yes, explain the reason behind this
difference.
Answer:
i) The formula for calculating the income per capita of a country is:
Income per capita = Gross Domestic Product/Total Population.
In this case, gross domestic product is 450,000 neons while total population is 1,500. Therefore,
the income per capita of Neonland is $450,000/1,500 = 300 neons.
ii) The formula for calculating the income per working age population is:
Income per worker = Gross Domestic Product/Number of people in employment
In this case, 50% of the population is in employment. Therefore, income per worker is
450,000 neons/750 = 600 neons.
iii) There is a difference of 600 neons - 300 neons = 300 neons between the two measures.
Income per capita is higher because the number of people in employment is lower than the total
population.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Income Per Worker
16
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58) The income per capita of Ruberia in a certain year was 7,240 rubies and the income per
capita of U.S. during the same year was $48,000. A bundle of goods that costs 100 rubies in
Ruberia has a price of $1,250 in the U.S. Which country has a higher income per capita using
PPP?
Answer: In order to compare the income per capita of the countries, we need to use the
purchasing power parity factor to convert Ruberia's income per capita into U.S. dollars. The
price of a bundle of goods that costs 100 rubies in Ruberia is $1,250 in U.S. Thus, 1 ruby buys
the same amount of goods that $1,250/100 = $12.50 buys in the U.S. Therefore, 1 ruby is worth
$12.50. The income per capita of Ruberia in U.S. dollars is 7,240 rubies × 12.50 $/ruby =
$90,500. Thus, Ruberia has a higher income per capita.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Measuring Differences in Income per Capita
59) The income per capita of Country 1 in a certain year was 1,800 in its own currency while that
of Country 2 was 32,000 in its own currency.
i) If 1 unit of Country 1's currency is worth 6.5 units of Country 2's currency, which country
has a higher income per capita?
ii) Which country is likely to have a higher Human Development Index and why?
Answer:
i) In order to compare which country has a higher income per capita, we have converted
Country 1's income per capita into Country 2's currency. 1 unit of Country 1's currency is worth
6.5 units of Country 2's currency. Therefore, Country 1 has an income per capita of
1,800 × 6.5 = 11,700 in Country 2's currency. Therefore, Country 2 has a higher income per
capita.
ii) The United Nations' Human Development Index is a composite index which combines
income per capita, life expectancy, and measures of education to more holistically measure the
standard of living. There is a strong association between income per capita and this measure of
the standard of living. A country with a higher income per capita is likely to have a higher
Human Development Index. Therefore, Country 2 is likely to have a higher Human
Development Index.
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Inequality in Income per Capita
6.2 Productivity and the Aggregate Production Function
1) Workers in an economy are likely to be more productive if:
A) the size of the population is high.
B) the economy has a high capital stock.
C) the unemployment rate in the economy is low.
D) the rate of inflation in the economy is high.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Productivity Differences
17
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2) Which of the following is an example of a physical capital in agricultural production?
A) A road
B) A tractor
C) A farmer
D) A common canal
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Productivity Differences
3) The productivity of workers in an economy is high if:
A) the economy has a large working age population.
B) the economy has a negative rate of inflation.
C) the economy has high levels of human capital.
D) the economy has low capital stock.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Productivity Differences
4) The average number of years of schooling of workers in Argonia has increased. Which of the
following is likely to be true if all other variables remain unchanged?
A) The efficiency units of labor in Argonia is likely to increase.
B) The income per worker in Argonia is likely to decrease.
C) The unemployment rate in Argonia is likely to increase.
D) The aggregate price level in Argonia is likely to decrease.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Productivity Differences
5) An economy with better technology is likely to:
A) use more labor than capital.
B) achieve higher productivity.
C) have less capital stock.
D) have lower levels of human capital.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Productivity Differences
18
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6) Suppose the average productivity of workers in Country A is equal to that of workers in
Country B. If Country A has higher total efficiency units of labor than Country B, it implies that
________.
A) Country B has a larger supply of workers
B) Country A has a larger supply of workers
C) Country A has a larger stock of capital
D) Country B has a larger stock of capital
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Productivity Differences
7) An aggregate production function:
A) shows various combinations of labor and capital that can be used to produce a particular
good.
B) shows various quantities of two goods that can be produced at a given cost.
C) shows the relationship between a country's output and its price level.
D) shows the relationship between a country's GDP and its factors of production.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Aggregate Production Function
8) Total efficiency units of labor is:
A) obtained by dividing the total capital stock of the economy by the total number of workers.
B) obtained by multiplying the total population of the economy by the average amount of capital
available to each worker.
C) obtained by dividing the total number of workers in the economy by the average efficiency of
each worker.
D) obtained by multiplying the total number of workers in the economy by the average
efficiency of each worker.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor
9) Total efficiency units of labor in an economy increases if ________.
A) each worker earns a lower wage
B) each worker becomes more productive
C) the average number of hours worked by each worker decreases
D) the amount of capital available to each worker diminishes
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor
19
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10) A country has 6,000 total efficiency units of labor. If the average efficiency of each worker
in the economy doubles, the country will have ________ efficiency units of labor, everything
else remaining unchanged.
A) 300
B) 12,000
C) 36,000
D) 48,500
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Labor
11) The total number of workers in two different countries are equal. However, each worker in
Country A is three times more productive than a worker in Country B. Which of the following is
true in this case?
A) The total efficiency units of labor in Country A is one-third of the total efficiency units of
labor in Country B.
B) The total efficiency units of labor in Country A is three times more than the total efficiency
units of labor in Country B.
C) The capital stock in Country B is three times more than the capital stock in Country A.
D) The total efficiency units of labor in Country B is six times more than the total efficiency
units of labor in Country B.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor
12) Which of the following is likely to reduce the total efficiency units of labor in an economy?
A) An earthquake that kills several people
B) A recession that lowers aggregate demand
C) An increase in the price level
D) A decrease in the price of capital
Answer: A
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Labor
13) Which of the following is likely to increase the productivity of workers in an economy?
A) An increase in the aggregate price level
B) The discovery of an oil field
C) An increase in the labor force participation rate in the economy
D) An increase in the number of years of training that each worker receives
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor
20
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14) If ________, total efficiency units of labor will increase.
A) firms hire more workers
B) the rate of unemployment increases
C) the capital stock of an economy decreases
D) the number of retired people in an economy increases
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor
15) Which of the following is likely to increase the total efficiency units of labor in an economy?
A) An increase in the inflation rate in the economy
B) An increase in the amount of capital available to each worker
C) An increase in the level of education attained by each worker
D) An increase in the unemployment rate in the economy
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor
16) ________ is likely to result in an increase in the total efficiency units of labor in an
economy.
A) An increase in the unemployment rate in the economy
B) A decrease in the labor force participation rate in the economy
C) An increase in the productivity of each worker in the country
D) A decrease in the capital-labor ratio in the economy
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Labor
17) Which of the following is likely to lead to an increase in the gross domestic product of a
country?
A) An increase in the capital stock of the economy
B) An increase in the unemployment rate in the country
C) An increase in the tax rates in the country
D) An increase in the interest rate in the country
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Capital
21
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18) Suppose a country's labor supply increases in a year while its capital stock remains constant.
Which of the following is likely to happen in this case if output is a function of capital and total
efficiency units of labor?
A) Its output per capita will decrease.
B) Its total output will decrease.
C) Its total output will increase.
D) Its total output will remain constant.
Answer: C
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
19) A country's capital stock decreased after a war while its labor supply remained constant.
Which of the following will happen in this case if output is a function of capital and efficiency
units of labor?
A) Its total output will remain constant.
B) Its total output will decrease.
C) Its per capita output will increase.
D) Its per capita output will remain constant.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
20) Laborland has 1 million workers. Suppose 50,000 workers migrate from a neighboring
country to join Laborland's work force. Which of the following will happen in this case if
Laborland's capital stock remains unchanged?
A) The marginal contribution of labor to Laborland's output will fall.
B) The relationship between output and capital stock becomes negative.
C) The total efficiency units of labor in the economy will decrease.
D) The country's income per worker will increase.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
21) The short run aggregate production function is subject to ________ if capital stock is
increased, holding the total efficiency units of labor as constant.
A) the Law of Diminishing Marginal Product
B) decreasing returns to scale
C) constant returns to scale
D) increasing returns to scale
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
22
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22) The ________ in output due to each additional unit of a factor of production is ________
when other factors are held constant.
A) increase; smaller
B) increase; larger
C) decrease; smaller
D) decrease; larger
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
23) Country A has a lower stock of capital than Country B, but the supply of labor in both the
countries is equal.
A) The increase in output due an additional unit of capital will be smaller in Country A than in
Country B.
B) The increase in output due an additional unit of capital will be larger in Country A than in
Country B.
C) An additional unit of capital will increase output in Country A only if there is an increase in
the total efficiency units of labor.
D) An additional unit of capital will increase output in Country B only if there is an increase in
the total efficiency units of labor.
Answer: B
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
24) The aggregate production function shows a(n) ________ relationship between ________ and
output.
A) decreasing; capital stock
B) increasing; capital stock
C) constant; labor
D) decreasing; labor
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
23
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Country X and Country Y have identical aggregate production functions as shown below. The
amount of capital stock available to each country is also equal. However, Country X has LX
amount of labor supply while Country Y has LY amount of labor supply.
25) Refer to the figure above. A one unit increase in labor supply will lead to ________ in output
in Country X than in Country Y.
A) a larger increase
B) a smaller increase
C) a larger decrease
D) a smaller decrease
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
26) Refer to the figure above. What does the slope of the aggregate production function imply?
A) Diminishing marginal product of labor
B) Diminishing marginal product of capital
C) Increasing returns to scale
D) Decreasing returns to scale
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
24
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27) Xenonia has a larger supply of labor than Techland. If the labor supply in both the countries
increases by the same amount while their capital stocks remain unchanged, ________.
A) the increase in Xenonia's output will be more than the increase in Techland's output
B) the increase in Techland's output will be more than the increase in Xenonia's output
C) Xenonia's income per capita will increase while Techland's income per capita will decrease
D) Xenonia's income per capita will decrease while Techland's income per capita will increase
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
28) In a graph with output in the Y axis and efficiency units of labor in the X axis, which of the
following causes a rightward movement along the aggregate production function?
A) An increase in the total efficiency units of labor
B) A decrease in the capital stock
C) An improvement in technology
D) A decrease in the productivity of workers
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
29) Which of the following causes an economy to move rightward along the aggregate
production function?
A) A decrease in the capital stock
B) An increase in the price level
C) An increase in the productivity of workers
D) An improvement in technology
Answer: C
Difficulty: Medium
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
30) What is human capital?
Answer: Human capital is each person's stock of ability to produce output or economic value.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Productivity Differences
31) What does the Law of Diminishing Marginal Product state?
Answer: The Law of Diminishing Marginal Product states that the marginal contribution of an
input to output is smaller when more of this input is being used in production.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: The Aggregate Production Function
25
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32) Eduland is currently producing Q amount of output using H efficiency units of labor.
However, several workers in Eduland died during a year due to an epidemic. How will this affect
output in the next year if all the other variables remained constant over the year? Explain with a
suitable diagram.
Answer: An economy's total output depends on its capital stock, total efficiency units of labor
and the level of technology it uses. If technology is assumed to be constant, an economy's
aggregate production function is of the form Y= F(K,H) where Y is total output, K is capital
stock and H is total efficiency units of labor. If capital stock is also assumed to be constant,
aggregate production function is an increasing function of efficiency units of labor as shown in
the given diagram. An economy's total efficiency units of labor is a product of the total number
of workers in the economy and the average efficiency of each worker. Therefore, a reduction in
the number of workers in an economy will reduce its total efficiency units of labor which will
reduce its total output as shown in the diagram below:
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
26
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33) Two countries—X and Y—have identical production functions. The efficiency units of labor
in both countries are also equal. However, Country X has KX units of capital stock while
Country Y has KY units of capital stock, as shown in the figure below.
How will increases in capital stock affect the output growth in these countries?
Answer: Country X has a lower capital stock than Country Y as can be seen in the given
diagram. Given the total efficiency units of labor, an increase in capital stock causes output to
increase in both the countries. However, the increase in output in Country X will be higher than
in Country Y. This is due to the law of Law of Diminishing Marginal Product, which states that
the marginal contribution of an input to output is smaller when more of this input is used in
production.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
34) Industria and Agraria are two neighboring countries. Suppose Good X is the only good
produced in both the countries and is a function of physical capital and efficiency units of labor.
It is found that a one unit increase in capital leads to a higher increase in the production of Good
X in Agraria than in Industria. What is the reason behind this if the number of efficiency units of
labor in both the countries are equal?
Answer: If the number of efficiency units of labor is constant, an increase in capital stock leads
to an increase in output. However, the increase in output is higher if less capital is used in
production. Thus, a one unit increase in capital causes a higher increase in output if the capital
stock is lower. This implies that the capital stock in Agraria is lower than the capital stock in
Industria.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
27
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6.3 The Role and Determinants of Technology
1) Which of the following causes the aggregate production function to shift up?
A) An increase in capital stock
B) A decrease in the productivity of workers
C) An increase in the total efficiency units of labor
D) An improvement in technology
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
2) Which of the following will result in an upward shift of the aggregate production function?
A) An increase in the rate of taxation in the economy
B) An increase in productivity due to the discovery of an advanced technology
C) An increase in the aggregate price level in the economy
D) An increase in the number of educated people in the economy
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Representing the Aggregate Production Function
28
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The following figure shows the total output that an economy can produce using varying amounts
of capital.
3) Refer to the figure above. The increase in output due to the same one-unit increase in capital is
greatest at point ________.
A) A
B) B
C) C
D) D
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
4) Refer to the scenario above. The increase in output due to a one-unit increase in capital is
smallest at point ________.
A) A
B) B
C) C
D) D
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Representing the Aggregate Production Function
29
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5) Refer to the scenario above. Suppose a country is currently at point C. Which of the following
will happen if it experiences an improvement in technology?
A) It will move from point C towards point D.
B) It will move from point C toward point A.
C) The curve will shift upward.
D) The curve will shift downward.
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Technology
6) The aggregate production function of an economy shifts upward when ________ produce a
higher output.
A) the same amount of capital and a higher amount of labor
B) a higher amount of capital and labor
C) the same amount of labor and a higher amount of capital
D) the same amount of capital and labor
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Technology
7) If a foreign company operating in a country changes work rules resulting in a more flexible
allocation of resources in the various sectors of the domestic economy,________.
A) the productivity of domestic workers is likely to increase
B) the productivity of domestic workers is likely to decrease
C) the gross domestic product of the economy is likely to decrease
D) the Human Development Index of the country is likely to decrease
Answer: A
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: Efficiency of Production and Productivity at the Company Level
8) Which of the following is likely to happen if there is an increase in entrepreneurial activity in
an economy?
A) The income per capita of the economy will fall.
B) The productivity of the economy will increase.
C) The inflation rate in the economy will decrease.
D) The exchange value of its currency in the foreign exchange market will increase.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Entrepreneurship
30
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9) What is Moore's Law?
Answer: A long-term trend of rather remarkable regularity in the development of computer
microprocessors has been observed since 1965. It is called Moore's Law after Intel co-founder
Gordon Moore, who predicted in that year that the number of transistors on a chip would double
approximately every two years. The number of transistors is a key determinant of how fast a
computer processor is. Thus, Moore's Law implies that computer processor power should double
approximately every two years. Several other measures of technological advances in computing
have also behaved according to Moore's Law. For example, the number of pixels in digital
cameras and RAM storage capacity has also doubled every two years or so, while power
consumption of computer nodes and hard disc storage costs appear to have been halved
approximately every two years.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: Moore's Law
10) Explain why there is nothing predetermined about the relationship between time and
progress in technology that would make Moore's Law into an actual law.
Answer: Accordingly to Moore's Law, technological advances should double every two years.
However, there is nothing predetermined about the relationship between time and progress in
technology that would make this into an actual "law." This progress results from the investments
of several companies in new computer technologies, which are in turn driven by the profitability
of these investments. It also relies on government support for university and private research and
on the ability of the United States and other advanced and developing nations to attract
increasing numbers of young, talented students into science, engineering, and related fields.
Things can change in the future, halting this rapid progress in technology. Fewer college students
could choose to major in science and engineering in the future, or governments could decide to
limit or even stop their support for private or university research, weakening incentives for
further technological advances. Moreover, even without a major cutback in funding or a change
in the profitability of research in this area, the rate of advance may slow down from its current
breakneck pace.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: Moore's Law
11) What role does research and development play in increasing productivity?
Answer: Research and development refers to the activities directed at improving scientific
knowledge, generating new innovations or implementing of existing knowledge to production in
order to improve the technology of a firm or an economy. Since an improvement in technology
increases productivity, research and development facilitates increases in productivity.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Dimensions of Technology
31
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12) How does an increase in competition in an industry usually affect productivity?
Answer: Increase in competition in an industry changes work rules in a way that allows for a
more flexible allocation of labor across tasks and better utilization of resources. This leads to a
significant increase in productivity in the industry.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: Efficiency of Production and Productivity at the Company Level
13) Can unionization in an industry adversely affect productivity? Explain your answer.
Answer: Unionization of labor in an industry can adversely affect productivity if it prevents an
efficient allocation of labor across different tasks. It can also affect productivity aversely if it
does not allow reduction in the number of workers or wages when required.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Letting the Data Speak: Efficiency of Production and Productivity at the Company Level
14) Redland produced 10 million tonnes of wheat in a certain year using a given stock of capital
and efficiency units of labor. It was able to increase production to 15 million tonnes within two
years without any increase in its capital stock or the number of efficiency units of labor. Suppose
wheat is the only good produced in Redland. What is likely to be the reason behind the increase
in production? Explain with a suitable diagram.
Answer: An improvement in technology enables an economy to produce a higher amount of
output from the same amount of capital stock and labor. Thus, an improvement in technology is
the reason behind Redland's increased output. Such an improvement in technology causes an
economy's aggregate production function to shift up as shown in the diagram below:
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Technology
32
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Appendix: The Mathematics of Aggregate Production Functions
1) Which of the following is true?
A) The sum of the coefficients of capital and efficiency units of labor in a Cobb-Douglas
production function is greater than 1.
B) The sum of the coefficients of capital and total efficiency units of labor in a Cobb-Douglas
production function is less than 1.
C) The Cobb-Douglas production function exhibits increasing returns to scale.
D) The Cobb-Douglas production function exhibits constant returns to scale.
Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Appendix
2) In an economy, if three-fourths of national income goes to labor, and one-fourth to capital
stock, the Cobb-Douglas production function for this economy will be:
A) Y = A × K1/4 × L3/4
B) Y = A × K4 × L3
C) Y = A × 1/4 × K × 3/4 × L
D) Y = A × K1/3 × L2/3
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Appendix
3) Suppose an economy has the following production function: Y = A × K1/4 × H3/4. Which of
the following is true of this economy?
A) Production in this economy exhibits increasing returns to scale.
B) Production in this economy exhibits constant returns to scale.
C) Production in this economy exhibits decreasing returns to scale
D) Production in this economy decreases when the price level increase.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Appendix
4) 50% of the national income in an economy goes to labor. If this economy has a Cobb-Douglas
production function, ________ of its national income should go to capital.
A) 20%
B) 30%
C) 50%
D) 15%
Answer: C
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Appendix
33
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5) A country has an aggregate production function of the form: Y = A x K1/3 x H2/3. Which of
the following is likely to happen if the capital stock and the efficiency units of labor available to
the country increases by 10% over a span of 5 years while the state of technology used in the
country remains the same?
A) Output will increase by 5%.
B) Output will increase by 10%.
C) Output will increase by 1%.
D) Output will double.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Appendix
6) Suppose production in an economy is represented by a Cobb-Douglas production function. If
each worker in the economy becomes more productive while the number of workers in the
economy, the capital stock and the state of technology remains unchanged, ________.
A) the gross domestic product of the economy will increase
B) the income per capita of the economy will decrease
C) the inflation rate in the economy will decrease
D) the exchange value of its currency will increase in the foreign exchange market
Answer: A
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Appendix
7) Two countries, Rhodia and Rubium, have identical production functions of the form:
Y = A × K0.25 × H0.75
Both countries have the same amount of capital stock and use the same technology. However,
the total efficiency units of labor available in Rhodia is higher than that in Rubium. Which of the
following is likely to be true in this case?
A) The gross domestic product of Rhodia is higher than that in Rubium.
B) The gross domestic product of Rubium is higher than that in Rhodia.
C) The Human Development Index of Rhodia is lower than that of Rubium.
D) The poverty rate in Rhodia is likely to be higher than that in Rubium.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Appendix
34
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8) Two countries, Baltonia and Polonia, have aggregate production functions of the form:
Y = A × K1/3 × H2/3
Both countries have the same number of efficiency units of labor and use the same technology.
However, Baltonia has a lower capital stock than Polonia. Which of the following is likely to be
true in this case?
A) The gross domestic product of Baltonia is higher than that in Polonia.
B) The gross domestic product of Baltonia is lower than that in Polonia.
C) The Human Development Index of Baltonia is higher than that of Polonia.
D) The poverty rate in Baltonia is lower than that in Polonia.
Answer: B
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Appendix
9) The aggregate production function of Ritland is Y = A × K0.3 × H0.7. The total output
produced in Ritland in a certain year was worth $135,000. The technology used in the country
improved over the next 10 years while the capital stock and the efficiency units of labor
remained approximately the same. Which of the following is likely to be true in this case?
A) The gross domestic product of the country is likely to increase.
B) The gross domestic product of the country is likely to decrease.
C) The Human Development Index of the country is likely to improve.
D) The inflation rate in the country is likely to reduce.
Answer: A
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Appendix
10) What are the features of a Cobb-Douglas production function?
Answer: A Cobb-Douglas production function is of the form: Y= A × Ka × Hb. Y denotes total
output, A denotes the level of technology, K denotes the capital stock, and H denotes the number
of efficiency units of production. The coefficients of K and H show the percentage of
contribution of each factor of production to the gross domestic product. These coefficients
always add up to 1. This ensures that the production function exhibits constant returns to scale.
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Appendix
35
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11) Blueland is a small island country which specializes in the production of yachts. It has a
Cobb-Douglas aggregate production function.
i) How will the production of yachts get affected if the technology used for production in
Blueland improves?
ii) How will Blueland's output get affected if both efficiency units of labor and capital stock
increase by 12.5% but the level of technology remains unchanged?
Answer:
i) A Cobb-Douglas production function is of the form: Y = A × Ka × Hb. Y denotes total
output, A denotes the level of technology, K denotes the capital stock and H denotes the number
of efficiency units of production. A higher value of A denotes better technology. Thus, if the
technology used for production in Blueland improves, A will increase. This will cause Blueland's
production of yachts to increase.
ii) A Cobb-Douglas production function exhibits constant returns to scale. Therefore, a 12.5%
increase in both efficiency units of labor and capital stock in Blueland will lead to a 12.5%
increase in its output.
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Appendix
12) Techland's aggregate production function is Y = A × K1/3 × H2/3. Find out the contribution
of technology to Techland's GDP if its gross domestic product is $2,000,000, capital stock is
125,000 units and total efficiency units of labor is 1,000,000.
Answer: The contribution of technology to Techland's gross domestic product can be
determined by using the formula: A = Y/(K1/3 × H2/3). In this case, Y = $2,000,000, K = 1,000,
and H = 125,000. Therefore, A = 2,000,000/(1,25,0001/3 × 100,0002/3) = 5.
Difficulty: Hard
AACSB: Application of Knowledge
Topic: Appendix
36
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