Problem Sets Macroeconomics Week 3
by Hieu Nguyen
Quick Check Multiple Choice
1. increases in the amount of human capital in the economy tend to — real incomes because
they increase the — of labor.
A. increase; bargaining power
B. increase; productivity
C. decrease; bargaining power
D. decrease; productivity
2. most economists are — that natural resources will eventually limit economic growth. As
evidence, they note that the prices of most natural resources, adjusted for overall inflation,
have tended to — over time.
A. concerned; rise
B. concerned; fall
C. not concerned; rise
D. not concerned; fall
3. Because capital is subject to diminishing returns, higher saving and investment do not
lead to higher —
A. income in the long run.
B. income in the short run.
C. growth in the long run.
D. growth in the short run.
4. When the Japanese car maker Toyota expands one of its car factories in the United States,
what is the likely impact of this event on the gross domestic product and gross national
product of the United States?
A. GDP rises and GNP falls.
B. GNP rises and GDP falls.
C. GDP and GNP both rise but GDP rises by more.
D. GDP and GNP both rise but GnP rises by more.
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5. Thomas Robert Malthus believed that population growth would —
A. put stress on the economy’s ability to produce food, dooming humans to remain in
poverty.
B. spread the capital stock too thinly across the labor force, lowering each worker’s
productivity.
C. promote technological progress, because there would be more scientists and inven-
tors.
D. eventually decline to sustainable levels, as birth control improved and people had
smaller families.
Problems and Applications
1. Suppose that society decided to reduce consumption and increase investment.
a. How would this change affect economic growth?
b. What groups in society would benefit from the change, and who might be adversely
affected?
2. What is the opportunity cost of investing in capital? Do you think a country can “overinvest”
in capital? What is the opportunity cost of investing in human capital? Do you
think a country can “overinvest” in human capital? Explain.
3. From 1950 to 2000, manufacturing employment as a percentage of total employment in the
U.S. economy fell from 28% to 13%. At the same time, manufacturing output experienced
slightly more rapid growth than the overall economy.
a. What do these facts say about growth in labor productivity (defined as output per
worker) in manufacturing?
b. In your opinion, should policymakers be concerned about the decline in the share of
manufacturing employment? Explain.
4. In many developing nations, young women have lower enrollment rates in secondary school
than do young men. Describe several ways in which greater educational opportunities for
young women could lead to faster economic growth in these countries.
5. International data show a positive correlation between income per person and the health
of the population.
a. Explain how higher income might cause better health outcomes.
b. Explain how better health outcomes might cause higher income.
c. How might the relative importance of your two hypotheses be relevant for public
policy?
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