1. New growth theory, developed by economists like Joseph Schumpter and Paul Rom

Question

1. New growth theory, developed by economists like Joseph Schumpter and Paul Romer, predicts:

Select one:

a. growth will continue because our desire to act in our self-interest will lead to continuous expansion of human capital and new discoveries

b. growth will soon stop due to limited resources and the standard of living will remain at its current level

c. the current standard of living cannot be maintained and will crash back to subsistence levels once the population reaches a critical amount

d. in order for the leading nations to continue growing and be wealthy the rest of the nations will have to remain poor

2. According to the economic way of thinking, firms will be willing to borrow money (be in demand for loanable funds) if:

Select one:

a. the expected rate of profit is greater than the real interest rate.

b. the opportunity cost of borrowing is zero.

c. the real interest rate is zero.

d. the expected rate of profit is greater than the rate of inflation.

3. Compared to command based systems, market systems have shown to:

Select one:

a. lead to less competition and less efficient methods of production

b. lead to slower economic growth, but more overall economic stability

c. create stronger incentives to use resources in productive ways and do a very good job organizing resources to their most valued use.

d. result in weak incentives to work and poor organization of resources, thus less growth potential

4. Suppose an economy's GDP per capita is currently $20,000, and it's increasing at a rate of 2%. How long will it take for the GDP per capita to grow to $80,000?

Select one:

a. 80 years

b. 115 years

c. 70 years

d. 35 years

5. In which of the following cases would the capital stock of a nation definitely increase:

Select one:

a. when the rate of investment is positive

b. when people increase their savings

c. when the size of the output increases

d. when the rate of investment is greater than the rate of depreciation

6 According to the law of diminishing returns, as the amount of one input, like capital increases, holding all else constant:

Select one:

a. the amount of labor employed will decrease

b. the amount of investment will decrease

c. output will increase at a decreasing rate

d. the output falls by and equal amount

Explanation / Answer

1) a is correct

According to new growth theory, economic growth takes places due to undying desires and unlimited wants of people.

2) a is correct

Interest rate paid on borrowing is a cost to firms. Firms will only borrow if increase in profit is greater than increase in cost of borrowing.

3) c is correct

In market based system, firms compete and efficient firm that uses the resources most efficiently survive. This encourages technology improvement, cost reducing techniques.

4) c is correct

According to rule of 70 output doubles in 70/2= 35

In 35 years output becomes 40000 . In another 35 years output becomes 80000. In total it takes 70 years to get to 80000.

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