Chapter 1 Economic Growth: an Introduction to Scarcity and Choice

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TRUE/FALSE

1. Since 1977, the growth rate of per capita GDP in the U.S. has been lower than it was in previous periods.

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2. The four primary resources are land, labor, capital, and entrepreneurship.

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3. The production possibilities curve shows the maximum combinations of goods and services that can be produced by an economy when unemployment is below the natural rate.

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4. All points on or below the production possibilities curve are attainable.

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5. The economic decisions that influence growth are those that increase capital and improve technology.

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6. It pays to increase the production of capital goods if the marginal cost of the production decision exceeds the marginal benefit.

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7. It is always better for the economy to experience economic growth.

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8. As resources are transferred from production of trucks to the production of computers, marginal cost of computers decreases.

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9. Technological improvement allows more output to be obtained from a given level of inputs, thereby shifting the production possibilities curve to the right.

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10. The decline in the growth of capital intensity in the United States has been caused largely by a rapid increase in labor inputs in addition to slow growth in capital inputs.

ANS: T PTS: 1

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11. The best combination of goods and services is being produced when marginal cost and marginal benefit are equal.

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12. Increases in resources, technological improvement, and efficiency improvement are all potential sources of economic growth.

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13. Growth based on capital accumulation can be more costly than growth based on efficiency improvement.

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14. The growth of labor productivity is caused by the growth of capital relative to labor and by technological and efficiency improvements.

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15. Rebuilding a destroyed property will create jobs and income, but it will not create new output.

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16. At one time, productivity per hour in Japan was almost twice as large as productivity per hour in the United States.

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17. Long term growth occurs if an economy increases its production possibilities.

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18. An axiom of economics is that the resources required to produce goods and services are scarce relative to people’s aggregate needs for goods and services.

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19. According to Gwartney, economic freedom causes prosperity

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20. Creative destruction leads to a decrease in economic growth

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21. New technology on its own is sufficient to achieve economic growth

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full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean 22. Technology catch up offers an advantage to today's developing countries.

ANS: T PTS: 1

23. The best technology for producing popcorn and tractors is the one that requires the most resources to produce a given combination of popcorn and tractors.

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24. Correlations between high levels of economic freedom and high standards of living prove that economic freedom causes prosperity.

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25. According to some economists, low taxes, free markets and price stability promote economic growth.

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26. Adam Smiths view of the political economy in 1776 was in direct contrast to the view set forth by Thomas Jefferson in the Declaration of Independence.

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27. The large investment in human capital by East Asian countries may be one reason they have experienced rapid income growth.

ANS: T PTS: 1

MULTIPLE CHOICE

1. Which of the following was authored by Adam Smith? a. Declaration of Independence b. Principles of Economics c. The Wealth of Nations d. The Academic Scribblers ANS: C PTS: 1

2. Which of the following statements does NOT describe China's economic growth over the last 20 years: a. Millions have escaped absolute poverty in China over the last 20 years. b. More people managed to escape dire poverty during this period than in any other 20-year period in history. c. Despite growth, people in China had less to eat and had fewer of life's necessities in 1991 than in 1978. d. Adjusted for inflation, per capita GDP increased over three times from 1978 to 1995. ANS: C PTS: 1

3. The economy in the U.S.: a. has recently been growing at a slower rate than it has since 1820. b. has recently been growing at a faster rate that it has since 1820.

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean c. has recently had a much higher growth rate than Japan and Korea. d. has recently experienced annual growth rates of over 5 percent. ANS: B PTS: 1

4. Which statement is FALSE? a. Brazil has been successful at closing its economic gap with the United States. b. The growth rates of per capita GDP in the U.S. and in Japan have slowed in the years since 1977. c. China's per capita GDP growth has dramatically increased since 1973. d. Since 1990, the U.S. has gained a growth advantage over Japan. ANS: A PTS: 1

5. Economic stagnation has become a concern because: a. growth rates in industrialized countries have declined significantly over the 1977 - 1990 time period. b. Third World countries have experienced extremely high growth rates since 1972. c. growth rates in Third World countries have declined significantly over the 1977 - 1990 time period. d. growth rates in all countries have stagnated since 1972. ANS: A PTS: 1

6. The U.S. GDP per capita since 1960 has: a. grown faster than that of China, Japan, India and South Korea. b. decreased compared to that of China, Japan, India and South Korea. c. has remained the same as that of China, Japan, India and South Korea. d. None of these choices. ANS: B PTS: 1

7. The four primary resources are: a. land, labor, stocks, and bonds. b. land, labor, capital, and entrepreneurship. c. land, capital, equipment, and facilities. d. land, labor, productivity, and entrepreneurship. ANS: B PTS: 1

8. Capital resources consist of: a. land and physical capital. b. physical and human capital. c. land and human capital. d. labor and human capital. ANS: B PTS: 1

9. Resources found in nature, such as land, water, forests, mineral deposits, and air are called: a. land resources. b. labor resources. c. capital resources. d. natural resources.

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean ANS: A PTS: 1

10. Efforts and services of people in production of goods and services are: a. land. b. labor. c. capital. d. human capital. ANS: B PTS: 1

11. Man-made, durable items used in the production processes are: a. land. b. labor. c. capital. d. equipment. ANS: C PTS: 1

12. A production possibilities curve shows: a. the maximum combinations of two goods or services that can be produced when resources are fully used and the best technology is employed. b. the minimum combinations of two goods or services that can be produced when resources are fully used and the best technology is employed. c. the maximum combinations of two goods or services that can be produced when the unemployment rate in the economy is not above 6 percent. d. the maximum combinations of two goods or services that can be produced when the economy is at the trough of the business cycle. ANS: A PTS: 1

13. In an economy that produces only popcorn and tractors, which statement best describes the opportunity cost of an additional tractor? a. The purchase price of the new tractor. b. The value of the popcorn that must be given up so that the tractor may be produced. c. The purchase price of one unit of popcorn. d. The value of the tractor gained minus the value of the popcorn given up. ANS: B PTS: 1

14. The best technology is: a. the technology that is cutting-edge technology. b. the technology that will maximize a business's average cost of production. c. the technology that is the most diffused throughout the economy. d. the technology that requires the fewest resources to produce a good. ANS: D PTS: 1

15. If an economy is currently producing at the point where marginal benefit and marginal cost are equal, we know that: a. the best technology is not being used. b. the economy should change its allocation of resources. c. unemployment exists in the economy.

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean d. the best combination of goods and services is being produced. ANS: D PTS: 1

16. In a world of scarcity: a. if we want to produce more of one good, we have to produce less of something else. b. there is no limit to what can be produced. c. the marginal cost of additional units of a good declines as more of the good is produced. d. we can have it all! ANS: A PTS: 1

17. Which of the following statements is correct? a. It is desirable to invest in more capital goods for future economic growth only if the marginal benefit of the investment exceeds the marginal cost. b. The marginal benefit of capital goods will increase as more capital goods are produced. c. In order to produce capital goods, more consumption goods must be produced in the present. d. As additional units of capital goods are produced, the marginal productivity of capital will increase, because labor will have more capital with which to work. ANS: A PTS: 1

18. A change in the best technology that allows more to be produced with a given amount of resources is referred to as: a. technological gain. b. technical efficiency change. c. technological growth. d. technological improvement. ANS: D PTS: 1

19. A change from the use of less than the best to the best technology is referred to as: a. efficiency progress. b. efficiency change. c. efficiency improvement. d. efficiency growth. ANS: C PTS: 1

20. A point outside the production possibilities curve refers to a combination that would be: a. attainable to produce. b. efficient to produce. c. inefficient to produce. d. unattainable to produce. ANS: D PTS: 1

21. If the economy moves from a point inside its production possibilities curve to a point on its production possibilities curve, there has been: a. Efficiency improvement. b. Technological improvement. c. Efficiency growth.

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean d. Technological growth. ANS: A PTS: 1

22. Which of the following would result in an outward shift of the production possibilities curve? a. Efficiency improvement. b. A decrease in capital. c. Technological improvement. d. A decrease in land. ANS: C PTS: 1

23. If society wishes to increase living standards while minimizing sacrifices of present consumption, it should encourage: a. growth in the labor supply. b. growth in capital. c. decreases in capital. d. technological improvement. ANS: D PTS: 1

24. Which of the following statements about economic growth is FALSE? a. Greater economic growth means sacrificing in the present for the future. b. Greater economic growth is always desirable. c. Capital accumulation can result in economic growth. d. Labor force growth can increase GDP, but not usually enough to increase living standards. ANS: B PTS: 1

25. Which of the following explains why technological improvement leads to economic growth? a. Fewer goods can be produced with the same amount of resources. b. More goods can be produced with the same amount of resources. c. Fewer employees are required to produce goods. d. None of these choices. ANS: B PTS: 1

26. Growth based on technological or efficiency improvements: a. cannot be explained. b. will result in a slower growth in the labor supply. c. will cost more than growth based on capital accumulation. . d. can cost much less than growth based on capital accumulation. ANS: D PTS: 1

27. The best combination of goods and services is: a. the one that fulfills wants as completely as possible b. the one that fulfills needs as completely as possible. c. One that balances an ideal distribution of goods and services. d. creates a marginal benefit. ANS: A PTS: 1

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean 28. In an economy that produces only popcorn and tractors, if more resources are transferred from popcorn production to tractor production: a. the value of popcorn goes up. b. the value of tractors goes down. c. transferred resources will become less and less efficient. d. all of these are true. ANS: B PTS: 1

29. Long-term economic growth occurs if: a. An economy increases its production possibilities. b. An economy increases its land. c. An economy increases its human capital. d. the political environment promotes economic freedom. ANS: A PTS: 1

30. Alfred Marshall, an eminent British economist, said he was drawn to study economics by his concerns about: a. political economy. b. a lack of competitive pressures. c. a failure of technology. d. poverty. ANS: D PTS: 1

31. If the United States wants productivity to increase it should: a. increase educational quality. b. invest less in capital. c. produce more consumer goods. d. decrease the rate of growth in the labor supply. ANS: A PTS: 1

32. Through war, many of the factories in country 1 are destroyed and many of its people are killed. As a result, after the war, the country's production possibilities curve (PPC): a. has probably shifted to the right compared to its PPC prior to the war. b. is probably the same PPC as before the war. c. has probably shifted to the left compared to its PPC prior to the war d. ability to produce goods and services has increased ANS: C PTS: 1

33. Annual growth rates of real GDP per capita from 1960-2011 are highest for: a. the U.S. b. India. c. Korea & China. d. Japan. ANS: C PTS: 1

34. After 1972, growth rates of DGP per capita increased in: a. the U.S.

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean b. China and India. c. Korea & Brazil. d. Japan. ANS: B PTS: 1

35. E-commerce has transformed the way people: a. browse. b. coast. c. research. d. shop. ANS: D PTS: 1

36. According to Gwartney, which of the following does not promote growth a. protectionism. b. free markets. c. low taxes. d. monetary stability. ANS: A PTS: 1

37. A Production Possibilities Curve (PPC) can: a. shift outward but not inward. b. shift inward or outward. c. shift inward but not outward. d. shift neither inward nor outward. ANS: B PTS: 1

38. Sheila currently does economic consulting for a firm. When she uses her skills to prepare a consulting report she is acting as: a. land in the production process. b. labor in the production process. c. capital in the production process. d. human input into the production process. ANS: B PTS: 1

39. Oil deposits found on the north slope in Alaska would be an example of: a. land. b. labor. c. capital. d. natural resources. ANS: A PTS: 1

40. A robot on an assembly line would be an example of: a. land. b. labor. c. capital. d. equipment.

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41. Which of the following is an example of capital? a. 100 shares of Intel stock. b. A $1,000 government bond. c. A $100 dollar bill. d. A computer used by a secretary. ANS: D PTS: 1

Housing Use the following diagram to answer the following questions.

42. Refer to Housing. The best technology is being used at: a. point A. b. point D. c. any point beyond the production possibilities curve. d. none of the points shown represent use of the best technology. ANS: A PTS: 1

43. Refer to Housing. A point at which the economy might be technically inefficient would be: a. A. b. B. c. C. d. D. ANS: D PTS: 1

44. Refer to Housing. The sacrifice of moving from point B to point A is: a. 850 units of housing. b. 75 units of housing. c. 100 units of cars. d. 200 units of cars.

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean ANS: C PTS: 1

45. Refer to Housing. As we move down the production possibilities curve from point A to point C, there will be: a. an increase in both the marginal cost and marginal benefit of cars. b. a decrease in both the marginal cost and marginal benefit of cars. c. a decrease in the marginal cost of cars and an increase in the marginal benefit of cars. d. an increase in the marginal cost of cars and a decrease in the marginal benefit of cars. ANS: D PTS: 1

46. Suppose the economy is producing at a point on its production possibilities curve where the marginal benefit of an additional unit of housing is $70,000 while the marginal cost of an additional unit of housing is $78,000. In this instance: a. the production of housing should decrease. b. the production of housing should increase. c. the production of housing should not be changed. d. the production of housing should be increased only if there are homeless people. ANS: A PTS: 1

47. Suppose the economy is producing at a point on its production possibilities curve where the marginal benefit of an additional unit of capital is $45. The marginal cost of an additional unit of capital is $30. In this instance: a. the production of capital should decrease. b. the production of capital should increase. c. the production of capital should not be changed. d. the production of capital should be decreased if many people in society are unemployed. ANS: B PTS: 1

48. The management department's secretary has just gotten a new computer that allows him to do reports in less time. This is an example of: a. efficiency progress. b. efficiency change. c. efficiency improvement. d. efficiency growth. ANS: C PTS: 1

49. Engines Incorporated has just developed a revolutionary engine that will allow trucks to haul their loads across the country without stopping for fuel. This is an example of: a. technological improvement. b. technological progress. c. technical efficiency change. d. technological growth. ANS: A PTS: 1

Consumption Goods Use the following diagram to answer the following questions.

50. Refer to Consumption Goods. Production at which of the above points would result in the greatest long-term growth in GDP? a. A. b. B. c. C. d. D. ANS: C PTS: 1

51. Refer to Consumption Goods. Suppose the marginal benefit of moving from point B to point C is $500 while the marginal cost is $350. We know that: a. the economy should produce additional capital goods. b. the economy should produce additional consumption goods. c. the economy should stay at point B. d. the economy should move from point B to point A. ANS: A PTS: 1

52. As a result of free trade, the power of monopolies has declined in Small Land. This is an example of: a. the effect of technological diffusion. b. the catch-up effect. c. the structural change effect. d. the foreign trade effect. ANS: D PTS: 1

53. The ratio of capital to labor in production is referred to as? a. labor intensity b. technical progress. c. capital intensity. d. technological diffusion ANS: C PTS: 1

Pizza Use the following diagram to answer the following questions.

54. Refer to Pizza. Which of the points represents an inefficient production combination of pizza and ovens? a. A. b. B. c. C. d. D. ANS: C PTS: 1

55. Refer to Pizza. Which of the points represents an unattainable production combination of pizza and ovens? a. A. b. B. c. C. d. D. ANS: D PTS: 1

56. Refer to Pizza. Which of the points represent an attainable and efficient production combination of pizza and ovens? a. A and B. b. B and C. c. C and D. d. D and A. ANS: A PTS: 1

Ovens Use the following diagram to answer the following questions.

57. Refer to Ovens. Which combination of pizza and ovens at present (p0-p0) would more likely result in growth congruent with production possibilities curve (p1-p1) in the future? a. A. b. B. c. C. d. D. ANS: B PTS: 1

58. Refer to Ovens. Which combination of pizza and ovens at present (p0-p0) would more likely result in growth congruent with production possibilities curve (p2-p2) in the future? a. A. b. B. c. C. d. D. ANS: B PTS: 1

1. Evaluate the following statement. "Technical progress may be a less costly means of achieving long- term economic growth than increasing capital."

ANS: This statement could be correct. The student should recognize that both technical progress and increasing the amount of capital resources will shift the production possibilities curve outward. However, in the case of increasing capital resources, there is a sacrifice of current consumption. A smaller or perhaps no sacrifice is likely to be associated with technical progress.

PTS: 1

2. Why have some Asian countries experienced more rapid growth than some Latin American and African countries?

full file at http://testbankeasy.com Full file at http://testbankeasy.eu/Test-bank-for-Economics-and- Contemporary-Issues,-9th-Edition---Mclean The student should discuss the contribution of human capital to rapid growth. Maddison also points to several other attributes, appropriate incentives for individual decision makers, markets that allow prices to fluctuate, and a legal system that is obeyed and generates trust has led to the West German success in accumulating capital and in generating technical change. For many years, East Germany did not have the foundations of a well-functioning market economy in place. The absence of these foundations does much to explain the lack of economic success in East Germany.

PTS: 1

3. Explain why there are worldwide fears of economic stagnation.

ANS: The student can point out that declining growth rates exist for most of the major industrialized countries for successive periods since 1977. Japan’s tepid economic growth for its “lost decade” is another cause for concern. In addition, lower-income countries have also suffered a declining growth rate. Another factor may be the world-wide recession of 2008. Whether this is temporary, or whether this data reflects an error in measurement is a subject of disagreement.

PTS: 1

4. "If the United States is to remain number one in productivity, it must increase the quality of its labor force." Is this statement true or false? Defend your answer.

ANS: This statement is true. Although labor quality had little do with the decrease in productivity growth in the 1970s, there is some evidence that it is a factor in slower productivity growth in the 1980s. In today's economy, the most important skills for the labor force are its literacy and problem-solving skills. These are the skills that many young adults have not acquired in school. As a result, some economists argue that if the United States wishes to remain a leader in productivity, it must improve its labor quality.

PTS: 1

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