AP_Krugman_Textbook

386 section 7 Economic Growth and Productivity

Tackle the Test: Multiple-Choice Questions

1. Which of the following is a source of increased productivity
   growth?
   I. increased physical capital
   II. increased human capital
   III. technological progress
   a. I only
   b. II only
   c. III only
   d. I and II only
   e. I, II, and III


2. Which of the following is an example of physical capital?
   a. machinery
   b. healthcare
   c. education
   d. money
   e. all of the above


3. The following statement describes which area of the world?
   “This area has experienced growth rates unprecedented in
   history and now looks like an economically advanced country.”
   a. North America
   b. Latin America

c. Europe

d. East Asia

e. Africa

4. Which of the following is cited as an important factor
   preventing long-run economic growth in Africa?
   a. political instability
   b. lack of property rights
   c. unfavorable geographic conditions
   d. poor health
   e. all of the above


5. The “convergence hypothesis”
   a. states that differences in real GDP per capita among
   countries widen over time.
   b. states that low levels of real GDP per capita are associated
   with higher growth rates.
   c. states that low levels of real GDP per capita are associated
   with lower growth rates.
   d. contradicts the “Rule of 70.”
   e. has been proven by evidence from around the world.

Tackle the Test: Free-Response Questions

1. a. Draw a correctly labeled graph of an aggregate production
   function that illustrates diminishing returns to physical
   capital.
   b. Explain how your aggregate production function
   illustrates diminishing returns to physical capital.
   c. On your graph, illustrate the effect of technological
   progress.
   d. How is the level of human capital per worker addressed on
   your graph?

Answer (7 points)

Productivity after

technological

progress

Productivity before

technological

progress

Physical capital per worker

Real GDP
per worker

1 point:Vertical axis is labeled “Real GDP per worker.”

1 point:Horizontal axis is labeled physical capital per worker.

1 point:Upward-sloping curve is labeled “Aggregate production function” or

“Productivity.”

1 point:Curve increases at a decreasing rate (the slope is positive and

decreasing).

1 point:Equal increases in physical capital per worker lead to smaller

increases in real GDP per worker.

1 point:Upward shift of production function is labeled to indicate

technological progress.

1 point:Human capital per worker is held constant.

2. Assume that between 1940 and 2010:
   The amount of physical capital per worker grows at 2% per
   year.
   Each 1% rise in physical capital per worker (holding human
   capital and technology constant) raises output per worker
   by^1 ⁄ 2 of a percent, or 0.5%.
   There is no growth in human capital.
   Real GDP per capita rises from $30,000 to $60,000.
   a. Growing physical capital per worker is responsible for how
   much productivity growth per year? Show your
   calculation.
   b. By how much did total factor productivity grow over the
   time period? Explain.