Self-assessment test 5

Correct Answer: b) capital evolves over time because of investment and depreciation.
The Solow model is a fundamental model in macroeconomics that describes long-term economic growth. It explains how capital, labor, and technological progress contribute to the production of goods and services.
- Capital Dynamics: In the Solow model, capital is not constant. It evolves over time based on:
  - Investment: Adds to the stock of capital.
  - Depreciation: Reduces the stock of capital over time.
The interplay of these two forces determines whether the capital stock increases, decreases, or stabilizes.

Correct Answer: a) investment per worker exceeds depreciation per worker.
GDP per worker is directly related to capital per worker. More capital per worker (e.g., machines or tools) generally leads to higher productivity and output per worker.

Correct Answer: a) the evolution of GDP per worker is explained by capital accumulation.

Correct Answer: c) Level effects
- This is correct. A change in the savings rate influences the steady-state level of GDP per worker but does not affect its long-run growth rate.

Correct Answer: c) the growth rate of the per worker variables is equal to zero.
At the steady state:
- Investment per worker equals depreciation per worker.
- There is no net increase in capital per worker or output per worker.
- The growth rate of these variables becomes zero due to diminishing returns to capital.

Correct Answer: The correct answer is b) the levels of GDP per worker and capital per worker in Country A are larger in the initial than in the final long-run equilibrium, as a fall in the savings rate reduces the steady-state levels of these variables. During the transition, both GDP per worker and capital per worker decline to their new lower levels.

Correct Answer: c) reflects the trade-off between liquidity and return.
This is correct. Money demand is driven by the need for liquidity (ease of transactions) versus the opportunity cost of holding money instead of earning a return from other investments (like bonds). Higher interest rates encourage people to reduce money holdings in favor of assets with higher returns.

Correct Answer: d) money without intrinsic value.
This is correct. Fiat money lacks intrinsic value (unlike gold or silver) and derives its value from the trust and acceptance of the people and the government.

Correct Answer: b) is fixed by the Central Bank.
This is correct. In most modern economies, the Central Bank controls the money supply directly or indirectly. For example:
- The Central Bank controls money supply through open market operations:
  - Buying bonds: Injects money into the economy, increasing the money supply.
  - Selling bonds: Removes money from circulation, reducing the money supply.
- The money supply is therefore exogenously fixed by the Central Bank’s policy decisions.

Correct Answer: B) i∗>i∗∗
- With reduced money demand and a fixed money supply, the interest rate (i∗∗) decreases to restore equilibrium.

Correct Answer: d) because, during an economic expansion, the interest rate rises to restore money market equilibrium by discouraging people from holding money and encouraging them to hold non-monetary assets instead

Correct Answer: The correct answer is b) i*< i** because a contractionary monetary policy decreases the money supply, causing the interest rate to rise to restore equilibrium in the money market.

Correct Answer: b) set of assets that people use to buy goods and services from other people, but yields no return.

Correct Answer: e) the interest rate declines because the expansionary monetary policy raises money supply above money demand; therefore, a decrease in the interest rate restores the equality between money demand and money supply by encouraging people in holding money rather than non-monetary assets.

Correct Answer: b) Buying non-monetary assets injects money into the banking system, increasing the money supply and lowering the interest rate.