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Practice Questions

The Solow Model and Ideas Practice Questions

Review how to solve these questions with our Office Hours video on the Solow model, investment, and ideas.

A country’s economic growth is given by the following equation: Y=√K and the country invests 25% to making investment goods. Suddenly, through some invention, the country’s new production function becomes Y=4√K. Which of the following equations represents the country’s new investment function? *

a. I=.25√K

b. I=.5√K

c. I=√K

d. I=2√K

e. Can not be determined with the given information.

Cutting-edge growth occurs primarily because of increases in *

a. Investment.

b. Ideas.

c. Depreciation.

d. Capital.

e. a and b only.

f. a, b, and c only.

For the next three questions, consider the following two countries: Thrifty and Inventive. In Thrifty, people devote 50% of GDP (Y) to making new investment goods, so γ=.5, and their production function is Y=√K. In Inventive, people devote 25% of GDP to making new investment goods, so γ =.25, and their production function is Y=2√K. Both countries begin with K=100. What is the amount of investment in Inventive? *

a. .5

b. 2.5

c. 5

d. 10

e. 25

What is the amount of consumption in Thrifty? (Hint: Anything that is not invested of GDP is consumed) *

a. .5

b. 2.5

c. 5

d. 10

e. 25

In which country would you rather live? *

a. Thrify

b. Inventive

c. Indifferent between the two countries.

d. Cannot be determined from the given information.

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Principles of Economics Macroeconomics

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Principles of Economics: Macroeconomics

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