Question

3. Which of the following statements is (are) correct?

(x) If a country were to increase its saving rate, then in the long run it would also increase its level of capital and its level of income

(y) Country A and country B are the same except country A currently has a lower level of capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then output in country A increases by more than in country B.

(z) All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last year and by 100 units this year, the increase in output was greater for this year than last year.

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (z) only

4. Consider three imaginary countries. In Midland, saving amounts to $7,000 and consumption amounts to $15,000; in Lowland, saving amounts to $6,000 and consumption amounts to $24,000; and in Heartland, saving amounts to $9,000 and consumption amounts to $23,000. The saving rate is

A. higher in Heartland than in Lowland, and it is the same in Lowland and Midland.

B. higher in Midland than in Lowland, and it is the same in Midland and Heartland.

C. higher in Midland than in Heartland, and it is higher in Heartland than in Lowland.

D. higher in Lowland than in Heartland, and it is higher in Midland than in Lowland.

E. higher in Heartland than in Midland, and it is higher in Midland than in Lowland.

5. In the country of Golden, the price of copper increased from $3.00 per pound to $3.18 per pound during a time when the overall price level (CPI) in Golden increased from 130 to 140. During this period, the real price of copper in Golden _________.

A. decreased.

B. increased.

C. stayed the same.

D. might have increased, decreased or stayed the same; more information is needed to be sure.

Answer 1

3. according to the solow model, the long run level of capital and output per person depends on the level of savings. hence x is correct. due to diminishing returns, the returns of a capital are greater when the level of capital is smaller, hence the country with lower level of capital that is country A in this case, will experience a greater gain in the output when the capital increases by 100 unit. hence y is also correct. similarly when the country raises the capital by 100 units, then the increase in output will be greater last year as compared to this year. hence statement z is incorrect. so the correct answer is option b

4. total income in midland y = savings+consumption = s+c = 7000+15000 = 22000

savings rate = s/y = 7000/22000 = 0.318 = 31.8%

total income in lowland y = savings+consumption = s+c = 6000+24000 = 30000

savings rate = s/y = 6000/30000 = 0.20 = 20%

total income in heartland y = savings+consumption = s+c = 9000+23000 = 32000

savings rate = s/y = 9000/32000 = 0.281 = 28.1%

hence the correct answer is c

5. the correct answer is a