Download Problem Set Ch 10 Macro Col9e

Chapter 10 - The Classical Long-Run Policy Model: Growth and Supply-Side Policies
THE CLASSICAL LONG-RUN POLICY MODEL:
GROWTH AND SUPPLY-SIDE POLICIES
PROBLEM SET
NAME: _______________________________________ 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.
Chapter 10 - The Classical Long-Run Policy Model: Growth and Supply-Side Policies
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; $110,000
b. $30,000; $40,000; $50,000; $120,000; $140,000
c. $40,000; $50,000; $60,000; $110,000; $120,000
d. Why is median income a more meaningful measure than mean income?
6. List five policies that encourage growth.
Chapter 10 - The Classical Long-Run Policy Model: Growth and Supply-Side Policies
Answers to the Problem Set
The 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. 2.3
b. 1
c. 4
3. (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 positivelysloped, 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
Chapter 10 - The Classical Long-Run Policy Model: Growth and Supply-Side Policies
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.