Exogenous and Endogenous Economic Growth Models: Practice Questions and Solutions

See Mr. Stolyarov’s complete index of Intermediate Macroeconomics Problems and Solutions here.

Problem 71. Which of these statements regarding the Solow economic growth model are true? More than one answer may be correct.

(a) Capital accumulation can influence the growth rate in the steady state of the Solow model.
(b) The way to increase growth at the steady state of the Solow model is to increase total factor productivity.
(c) At the stable steady state for an economy, gross investment is equal to depreciation.
(d) At the steady state, if savings increases, consumption will simply decrease so as to not affect the growth rate of output.
(e) In the Solow model, population growth acts to decrease the amount of capital per worker and shift up the depreciation line.
(f) Changes in the savings rate will shift the total production Y = f(K, L).
(g) Changes in the savings rate will influence the linear function (n + d)K.
(h) Changes in the savings rate will shift the function sY.
(i) Higher savings and investment rates will result in a larger capital stock at the steady state.

Solution 71. The following statements regarding the Solow economic growth model are true:

(b): The way to increase growth at the steady state of the Solow model is to increase total factor productivity.
(c): At the stable steady state for an economy, gross investment is equal to depreciation.
(d): At the steady state, if savings increases, consumption will simply decrease so as to not affect the growth rate of output.
(e): In the Solow model, population growth acts to decrease the amount of capital per worker and shift up the depreciation line.
(h): Changes in the savings rate will shift the function sY.
(i): Higher savings and investment rates will result in a larger capital stock at the steady state.

Problem 72. Which of these statements is true about the Golden Rule in the Solow economic growth model?

(a) Under the Golden Rule, consumption is maximized in the steady state of the economy.
(b) Under the Golden Rule, investment is maximized in the steady state of the economy.
(c) The Golden Rule states that it is desirable to maximize the distance between the output function Y and the break-even investment function (n+d)K.
(d) The Golden Rule states that it is desirable to maximize the distance between the output function Y and the savings function sY.
(e) The Golden Rule states that it is desirable to maximize the distance between the savings function sY and the break-even investment function (n+d)k.
(f) Under the Golden Rule, marginal product of capital MPK is equal to the savings rate S.
(g) Under the Golden Rule, marginal product of capital MPK is equal to (n + d).
(h) The Golden Rule conditions are Pareto-optimal.

Solution 72. The following statements about the Golden Rule are correct:
(a): Under the Golden Rule, consumption is maximized in the steady state of the economy.
(c): The Golden Rule states that it is desirable to maximize the distance between the output function Y and the break-even investment function (n+d)K.
(g): Under the Golden Rule, marginal product of capital MPK is equal to (n + d).
(h): The Golden Rule conditions are Pareto-optimal.

Problem 73. Which of these are shortcomings of the Solow exogenous growth model? More than one answer may be possible.

(a) The Solow model exaggerates large differences in standards of living.
(b) The Solow model ignores the crucial role of government-printed paper money in stimulating long-term economic growth.
(c) Savings in the Solow model is assumed to be constant.
(d) The Solow model has no welfare considerations or means to assess welfare.
(e) The Solow model does not have any role for institutions – including property rights, legal arrangements, political mechanisms, and other factors.
(f) The Solow model assumes increasing returns to scale, which is simply unrealistic.
(g) In the Solow model, the savings elasticity with respect to output is too small and too delayed.
(h) The implied marginal return to capital in the Solow model is too small.
(i) By focusing our attention on economic growth, the Solow model ignores the truly important question, which is how to achieve equal distribution of wealth.
(j) The Solow economic growth model does not mention God. Therefore, it cannot possibly contain a shred of truth.

Solution 73. The following are shortcomings of the Solow model:

(c): Savings in the Solow model is assumed to be constant.
(d): The Solow model has no welfare considerations or means to assess welfare.
(e): The Solow model does not have any role for institutions – including property rights, legal arrangements, political mechanisms, and other factors.
(g): In the Solow model, the savings elasticity with respect to output is too small and too delayed.

Problem 74. Which of these statements are true regarding the Solow model and human capital? More than one correct answer is possible.

(a) If human capital is incorporated into the production function in the Solow model, then total factor productivity in the Solow model needs to be adjusted to exclude human capital.
(b) With human capital factor added into the production function, the Solow model explains about 66 percent of income per capita variations across countries.
(c) With human capital factor added into the production function, the Solow model explains about 80 percent of income per capita variations across countries.
(d) Without human capital factor added into the production function, the Solow model explains about 66 percent of income per capita variations across countries.
(e) Without human capital factor added into the production function, the Solow model explains about 80 percent of income per capita variations across countries.

Solution 74. The following statements are correct:
(a): If human capital is incorporated into the production function in the Solow model, then total factor productivity in the Solow model needs to be adjusted to exclude human capital.
(c): With human capital factor added into the production function, the Solow model explains about 80 percent of income per capita variations across countries.
(d): Without human capital factor added into the production function, the Solow model explains about 66 percent of income per capita variations across countries.

Problem 75. Which of these are true statements about endogenous growth models?

(a) Unlike exogenous growth models, endogenous growth models actually provide an explanation for where total factor productivity comes from.
(b) Only one steady state is possible with endogenous growth models.
(c) Multiple steady states are possible with endogenous growth models.
(d) Endogenous growth models incorporate increasing returns to scale over certain ranges.
(e) As in exogenous growth models, savings in endogenous growth models has only a level effect and no real growth effect.
(f) Endogenous growth models, like the Solow model, predict absolute convergence for standards of living among countries.
(g) Endogenous growth models imply that countries with different savings and investment rates will have large differences in economic growth rates.
(h) According to endogenous growth models, savings has no effect on technology.

Solution 75. The following statements are correct:

(a): Unlike exogenous growth models, endogenous growth models actually provide an explanation for where total factor productivity comes from.
(c): Multiple steady states are possible with endogenous growth models.
(d): Endogenous growth models incorporate increasing returns to scale over certain ranges.
(g): Endogenous growth models imply that countries with different savings and investment rates will have large differences in economic growth rates.

Problem 76. Which of these economists did pioneering work on endogenous growth models?

(a) John Maynard Keynes
(b) Thomas Malthus
(c) Paul Romer
(d) John Kenneth Galbraith
(e) David Ricardo
(f) Hans-Hermann Hoppe

Solution 76. The correct answer is (c): Paul Romer.

Problem 77. Which of these statements regarding growth traps and poverty traps in endogenous growth models are correct?

(a) Absolute convergence is still possible in the presence of growth and poverty traps.
(b) Poverty traps and growth traps exist because there are increasing returns to scale over certain ranges of capital investment.
(c) A poverty trap entails a high capital-labor ratio.
(d) A growth trap entails a high capital-labor ratio.
(e) Countries in poverty traps are not guaranteed to ever obtain high rates of economic growth.
(f) Countries in poverty traps can escape those traps by increasing their savings rates.
(g) Countries in poverty traps can escape those traps by increasing their consumption rates.
(h) Countries in growth traps can grow indefinitely without limit.

Solution 77. The following statements are correct:
(b): Poverty traps and growth traps exist because there are increasing returns to scale over certain ranges of capital investment.
(d): A growth trap entails a high capital-labor ratio.
(e): Countries in poverty traps are not guaranteed to ever obtain high rates of economic growth.
(f): Countries in poverty traps can escape those traps by increasing their savings rates.
(h): Countries in growth traps can grow indefinitely without limit.

Problem 78. Which of these statements about conditional convergence is true?

(a) Conditional convergence states that economies with the same savings rates, population growth rates, and access to technology will reach the same steady-state equilibrium.
(b) Conditional convergence states that economies with the same population growth rates and access to technology but different savings rates will have the same economic growth rates but at different steady-state equilibria.
(c) Conditional convergence is an extremely fast process, and we can expect it to happen over a time span of a few years.
(d) Conditional convergence is generally supported by empirical observation.
(e) The Solow exogenous growth model limits its predictions to conditional convergence for all countries.

Solution 78. The following statements are correct:
(b): Conditional convergence states that economies with the same population growth rates and access to technology but different savings rates will have the same economic growth rates but at different steady-state equilibria.
(d): Conditional convergence is generally supported by empirical observation.

See Mr. Stolyarov’s complete index of Intermediate Macroeconomics Problems and Solutions here.