Module M09 Quiz: Savings, Capital Formation and Growth

32 questions · Introductory · Mix of multiple choice, calculation, and short answer

How to use

Attempt each question before clicking Show Answer. For calculation questions, write out your working before checking.

Question 1

Lesson L01 · Savings-Investment Identity

In an open economy, if national saving (S) is less than domestic investment (I), then:

Type: Multiple Choice

A) Net exports are positive (NX > 0)
B) The current account is in surplus
C) Net exports are negative (NX < 0), implying a current account deficit
D) National saving equals investment by definition

Show Answer

Answer: C) Net exports are negative (NX < 0), implying a current account deficit

From S = I + NX: if S < I, then NX = S − I < 0. The country borrows from abroad to fund the excess of investment over saving. Australia has historically run current account deficits for this reason.

Question 2

Lesson L01 · Savings-Investment Calculation

An economy has GDP (Y) = $2,200b, Household consumption (C) = $1,320b, Investment (I) = $440b, and Government spending (G) = $440b. What are net exports (NX) and national saving (S)?

Type: Calculation

Show Answer

Answer: NX = $0b, S = $440b

From Y = C + I + G + NX: 2,200 = 1,320 + 440 + 440 + NX → NX = 0. National saving S = Y − C − G = 2,200 − 1,320 − 440 = $440b. Verify: S = I + NX → 440 = 440 + 0 ✓

Question 3

Lesson L01 · Growth

Explain the "twin deficits" hypothesis in one sentence.

Type: Short Answer

Show Answer

Answer: A government budget deficit reduces national saving

which can widen the current account deficit if investment is unchanged.

Question 4

Lesson L01 · Not Vice Versa.

Which of the following would NOT affect national saving (S) in S = I + NX?

Type: Multiple Choice

A) Household consumption
B) Government spending
C) Investment
D) Net exports

Show Answer

Answer: C) Investment

Investment is determined by saving and net exports

Question 5

Lesson L01 · A Current Account Surplus (Nx > 0) Implies National Saving Exceeds Domestic Investment (S > I).

If a country runs a current account surplus

Type: Short Answer

Show Answer

Answer: S and I are unrelated

a

Question 6

Lesson L02 · Δ Is The Depreciation Rate — The Fraction Of Capital That Wears Out Each Period.

In the capital accumulation equation ΔK = I − δK

Type: Short Answer

Show Answer

Answer: Output growth rate

b

Question 7

*Lesson L02 · *

If K = $3

Type: Short Answer

Show Answer

Answer:

Question 8

Lesson L02 · Growth

Why is depreciation necessary in the Solow model?

Type: Short Answer

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Answer: Depreciation prevents indefinite capital accumulation

creating a stable long-run equilibrium.

Question 9

*Lesson L02 · *

If Y = $1

Type: Short Answer

Show Answer

Answer: calc

Question 10

Lesson L02 · Leading To A Higher Steady State Capital Stock.

What happens to steady-state capital if the saving rate increases?

Type: Multiple Choice

A) K* rises
B) K* falls
C) K* stays the same
D) K* becomes negative

Show Answer

Answer: A) K* rises

A higher saving rate raises the saving curve

Question 11

Lesson L03 · When Saving/Investment Exceeds Depreciation

In the Solow diagram

Type: Short Answer

Show Answer

Answer: Output is falling

a

Question 12

Lesson L03 · 25

If y = k^0.5

Type: Short Answer

Show Answer

Answer:

Question 13

Lesson L03 · Growth

Why does the Solow model predict that saving rate increases only have a level effect?

Type: Short Answer

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Answer: Higher saving raises k and y

but growth stops at the new steady state. Sustained growth requires TFP.

Question 14

Lesson L03 · New K = (0.30/0.05)^2 = 36; Y = 36^0.5 = 6.

If s rises from 0.25 to 0.30 in y = k^0.5

Type: Short Answer

Show Answer

Answer:

6

Question 15

Lesson L03 · Growth

What is the key driver of sustained per-capita growth in the Solow model?

Type: Multiple Choice

A) Capital accumulation
B) Population growth
C) Technological progress
D) Government spending

Show Answer

Answer: C) Technological progress

Only TFP growth (A) can sustain rising living standards indefinitely in the Solow framework.

Question 16

Lesson L04 · A Higher Saving Rate Raises The Saving Curve

In the steady-state condition sf(k) = δk

Type: Short Answer

Show Answer

Answer: Output falls

a

Question 17

Lesson L04 · ~14.62

If y = k^0.4

Type: Short Answer

Show Answer

Answer:

Question 18

Lesson L04 · Intro

Why does MPK fall as k rises in the Solow model?

Type: Short Answer

Show Answer

Answer: Each additional unit of capital adds less output than the previous one due to fixed labour.

growth

Question 19

Lesson L04 · Mpk = Α × (Y/K) = 0.35 × (2.22/9.77) ≈ 0.0795.

If α = 0.35 and y* = 2.22

Type: Short Answer

Show Answer

Answer:

0.0795

Question 20

Lesson L04 · Growth

What is the "Golden Rule" saving rate?

Type: Multiple Choice

A) The rate that maximises steady-state consumption
B) The rate that minimises taxes
C) The rate that balances the budget
D) The rate that eliminates inflation

Show Answer

Answer: A) The rate that maximises steady-state consumption

The Golden Rule saving rate maximises steady-state consumption per worker.

Question 21

Lesson L05 · Growth

How does human capital (H) differ from physical capital (K) in the Solow model?

Type: Short Answer

Show Answer

Answer: Human capital (skills

education) cannot be as easily traded or imported as physical capital.

Question 22

Lesson L05 · (1.09)^2 ≈ 1.1881; $1

If a worker earns $1

Type: Short Answer

Show Answer

Answer:

$1,306.91

Question 23

Lesson L05 · Intro

Why might over-investment in low-demand qualifications reduce the return to education?

Type: Short Answer

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Answer: Excess supply of certain degrees can depress wages without raising productivity.

growth

Question 24

Lesson L05 · Growth

Which of the following policies would most directly raise human capital (H)?

Type: Multiple Choice

A) Building infrastructure
B) Subsidising R&D
C) Expanding vocational training
D) Cutting corporate taxes

Show Answer

Answer: C) Expanding vocational training

Vocational training directly increases workers' skills (H).

Question 25

Lesson L05 · The Average Return Is 8–10% Per Additional Year Of Schooling.

What is the approximate return to education (Mincer return) per additional year of schooling in Australia?

Type: Multiple Choice

A) 3–5%
B) 8–10%
C) 15–20%
D) 25–30%

Show Answer

Answer: B) 8–10%

Internationally

Question 26

Lesson L02 · Long-Run Growth

Richland's real GDP per person is $20,000, growing at 2% per year. Poorland's real GDP per person is $10,000, growing at 4% per year. Approximately how many years will it take for Poorland to catch up to Richland?

Type: Calculation

Show Answer

Answer: Approximately 35 years

Set $10,000 × (1.04)^t = $20,000 × (1.02)^t Divide: (1.04/1.02)^t = 2 Taking logs: t × ln(1.04/1.02) ≈ t × 0.02 = ln(2) ≈ 0.693 t ≈ 0.693/0.02 ≈ 35 years

After 10 years: Richland ≈ $24,380; Poorland ≈ $14,802. After 20 years: Richland ≈ $29,719; Poorland ≈ $21,911.

Question 27

Lesson L03 · Growth Accounting

An economy has the production function Y = AK^α L^(1-α). Annual economic growth is 3.5%. Both capital and labour grow at 2% per year. What is the contribution of total factor productivity (TFP) to growth?

Type: Calculation

Show Answer

Answer: TFP contributes 1.5% to growth

Growth Accounting: ΔY/Y = ΔA/A + α(ΔK/K) + (1-α)(ΔL/L) Since α + (1-α) = 1, and both K and L grow at 2%: Factor input contribution = α×2% + (1-α)×2% = 2% Therefore: 3.5% = TFP growth + 2% TFP growth = 1.5%

This is the Solow residual — growth not explained by capital or labour accumulation.

Question 28

Lesson L02 · Diminishing Marginal Returns

Three housepainters use brushes (Harrison: 100 m²/hr, Carla: 100 m²/hr, Fred: 80 m²/hr) or rollers (200 m²/hr each). With no rollers, average team productivity is 93.3 m²/painter-hour. With 1 roller (given to Fred), productivity rises to 133.3 m²/painter-hour. With 2 rollers (Fred + Harrison), it rises to 166.7. With 3 rollers (all three), it is 200. This pattern is an example of:

Type: Multiple Choice

A) Constant returns to scale
B) Increasing returns to capital
C) Diminishing marginal returns to capital
D) Negative returns to capital

Show Answer

Answer: C) Diminishing marginal returns to capital

The first roller adds 120 units of output (93.3 → 133.3 per painter × 3 painters: +120). The second adds 100. The third adds 100. The fourth adds zero. Each additional unit of capital (rollers) adds less to output — classic diminishing marginal returns to capital.

Question 29

Lesson L03 · Labour Productivity

Germany's real GDP per person grew from $25,756 (1979) to $42,365 (2008) while its employment-to-population ratio rose from 0.33 to 0.49. Japan's GDP per person grew from $25,344 to $45,166 while its employment ratio only rose from 0.48 to 0.51. In which country was productivity growth (output per worker) the main driver of GDP per person growth?

Type: Multiple Choice

A) Germany — productivity was the main driver
B) Japan — productivity was the main driver
C) Both countries — equal contributions
D) Neither — employment growth dominated in both

Show Answer

Answer: B) Japan — productivity was the main driver

Average labour productivity = GDP per person ÷ (employment/population). Germany: 1979: 25,756/0.33 = 78,049; 2008: 42,365/0.49 = 86,459. Productivity rose ~10.8%; employment ratio rose ~48.5%. Germany's growth was mostly from more people working. Japan: 1979: 25,344/0.48 = 52,800; 2008: 45,166/0.51 = 88,561. Productivity rose ~67.7%; employment ratio rose only ~6.3%. Japan's growth was mostly from higher productivity per worker.

Question 30

Lesson L04 · Solow Model

An economy has the production function Y/L = (K/L)^0.5. The saving rate (θ) = 0.28, population growth (n) = 0.03, and depreciation (d) = 0.04. What is the steady-state output per worker (Y/L)?

Type: Calculation

Show Answer

Answer: Y/L = 4

In steady state: θ(Y/L) = (n+d)(K/L) With Y/L = (K/L)^0.5: θ(K/L)^0.5 = (n+d)(K/L) Rearranging: (K/L)^0.5 = θ/(n+d) → K/L = [θ/(n+d)]²

Steady-state Y/L = θ/(n+d) = 0.28/(0.03 + 0.04) = 0.28/0.07 = 4

Compare to a less-developed country with θ=0.10, n=0.06, d=0.04: Y/L = 0.10/(0.06+0.04) = 0.10/0.10 = 1 This illustrates why saving rates and population growth matter for long-run income levels.

Question 31

Lesson L04 · Solow Model

In the Solow-Swan model, which of the following would increase the steady-state capital-labour ratio (k*)?

Type: Multiple Choice

A) A rise in the population growth rate
B) A rise in the depreciation rate
C) A fall in the savings rate
D) A rise in the savings rate

Show Answer

Answer: D) A rise in the savings rate

The steady-state condition is θy = (n+d)k. - Rising savings (θ↑): shifts saving curve UP → higher k ✓ - Rising n or d: steepens replacement line (n+d)k → lower k ✗ - Falling θ: shifts saving curve DOWN → lower k* ✗

A higher savings rate allows more investment, accumulating more capital per worker until the new (higher) steady state is reached.

Question 32

Lesson L04 · Solow vs Keynesian

A rise in the marginal propensity to save (MPS) has opposite effects in the Keynesian model versus the Solow-Swan model. Which statement correctly describes this contrast?

Type: Multiple Choice

A) Higher MPS raises output in both models
B) Higher MPS lowers output in Keynesian (via lower AD) but raises long-run income per worker in Solow (via capital accumulation)
C) Higher MPS raises output in Keynesian (via higher investment) but lowers Solow steady state
D) Both models predict lower output with higher MPS

Show Answer

Answer: B) Higher MPS lowers output in Keynesian (via lower AD) but raises long-run income per worker in Solow (via capital accumulation)

Keynesian: Higher saving = lower MPC → lower multiplier → AD shifts left → output falls (Paradox of Thrift). Solow: Higher saving rate (θ↑) → more investment → capital accumulates → steady-state k and y rise. The key insight: these models operate on different timescales. In the short run (Keynesian), saving hurts. In the long run (Solow), saving helps.