This test is in two parts: Part I is a multiple-choice test that covers chapters 2-5. It is expected that you will be taking this as an “open book” test, so you should score very well on part I. Part II has 2 problems. Please answer them both completely on separate sheets of paper (write on one side of paper only). Use well-labeled graphs to illustrate your points as appropriate.
Part I.: Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 1. In an economy with two goods, beer and pizza, if pizza costs $10 per pie and beer costs $5 per six pack and if
100 six packs of beer and 200 pizzas are produced in a year, then nominal GDP that year would be: a. $2,000. c. $1,500. b. $2,500. d. none of the above.
____ 2. Gross private domestic investment includes a. durable goods. c. financial assets. b. residential structures. d. all of the above.
____ 3. National income and GDP diverge in practice because of: a. subsidies. c. taxes. b. depreciation of capital. d. all of the above.
____ 4. Added to national income to get personal income is: a. personal income receipts on assets. b. net interest. c. contributions for social insurance. d. all of that above.
____ 5. The labor force participation rate is: a. the labor force divided into population. b. the labor force divide by population. c. the labor force times population. d. the labor population minus the labor force.
____ 6. During the transition to the steady state in the Solow growth model: a. the output per worker rises. c. the rate of growth of capital rises. b. labor force participation rises. d. all of the above.
____ 7. The Solow residual: a. is not directly observable. b. attributed to labor force growth. c. is attributed to capital stock growth. d. is attributed to labor force growth and capital stock growth.
____ 8. In the Solow model, the growth rate of the capital stock is a function of a. the saving rate and the depreciation rate. b. the saving rate and the labor force participation rate. c. the labor force participation rate and the technology growth rate. d. the depreciation rate and the labor force participation rate.
____ 9. In the Solow growth model, the average product of capital a. increases as capital per worker rises. b. remains constant as capital per worker rises. c. declines as capital per worker rises. d. declines, then rises, as capital per worker rises.

____ 10. In the Solow growth model in the steady state the growth rate of capital per worker, k*, is: a. rising. c. fluctuating. b. falling. d. zero.
____ 11. If the level of technology increases in the Solow growth model, then in the steady state, the growth rate of capital per worker is: a. higher. b. unchanged. c. lower. d. rising.
Figure 4.1
Determinants
of k/k
____ 12. In Figure 4.1, if the saving rate increase, then: a. s•(y/k) and s + n increase. c. s•(y/k) and s + n decrease. b. s•(y/k) increases while s + n decreases. d. s•(y/k) decreases while s + n increase.
____ 13. In Figure 4.1, if the initial amount of labor increases, then in the steady state: a. the growth rate of capital per worker increases. b. the growth rate of output per worker rises. c. the growth rate of output per worker is the same. d. the population growth rate rises.
____ 14. When converging economies: a. have the same growth rate of capital per worker. b. the same steady state capital per worker, k*. c. have the same growth rate of output per worker. d. all of the above.
____ 15. Convergence will not happen if economies around the world have: a. different savings rates. b. different population growth rates. c. different optimum levels of capital per worker, k*. d. all of the above.
____ 16. In the key equation for convergence a. the initial level of output. b. the initial level of output per worker.
, y(0) is: c. the optimum level of output. d. the optimum level of output per worker.

____ 17. Convergence can be seen in the data of all countries together if one holds constant: a. the saving rate. c. the degree the rule of law is maintained. b. the fertility rate. d. all of the above.
____ 18. If sA > s + n in the model with constant average product of capital, the long run growth rate is: a. constant. b. positive c. negative. d. cyclical.
____ 19. In the Solow growth model with technological progress, a. k* is constant. c. k* is cyclical. d. k* is declining. b. k* is growing
____ 20. In endogenous growth models, technological progress comes from: a. outside the system. c. increases in the capital stock. b. research and development. d. all of the above.
____ 21. To encourage firms to engage in research and development (R&D), governments grant temporary monopolies in the production of the word or symbol based goods like books and computer code that result from R&D called: c. anti-trust exemptions. d. all of the above. a. cartels. b. copyrights.
____ 22. The ability to control the inventions from R&D spending is known as a. greed. c. intellectual property rights. d. all of the above. b. a rival good.
____ 23. Steady state growth is when: a. when the average product of capital, y/k, is unchanging as k increases at a constant rate. b. when the rate of growth of capital per worker is constant at zero. c. when the rate growth of output per worker is constant at zero. d. all of the above.
____ 24. The evidence on conditional convergence a. indicates that conditional convergence holds for a broad group of countries. b. fails to show any notable signs of conditional convergence. c. indicates that absolute convergence is more likely than conditional convergence. d. fails to hold constant variables such as saving rates and fertility rates, so is inconclusive.
Part II: Written answers.
1.
History has shown that countries that move from a state of having a stable government to one of ongoing upheaval and civil unrest with many changes of government (often through military coups) often experience an absolute decrease in standards of living. In other words, there is negative growth. a. Using equation 3.4 (page 53), which of the exogenous parameters of the equation could be used in the
Solow model to account for social civil stability? Justify your answer. b. Use the Solow Growth Model to show how a change in social civil stability could result in not only a decrease in k*, but also a situation where Δk/k is negative. Explain using well-labeled graphs.
2. Answer question 6 on page 69 of your text.