Suppose That Two Countries Share Identical Levels of Total Factor

question 20

Multiple Choice

Suppose that two countries share identical levels of total factor productivity,identical labor force growth rates and identical savings rates. According to the Solow model

• A) the country with the greater initial level of output per worker will grow more rapidly than the country with the smaller initial level of output per worker.
• B) the country with the smaller initial level of output per worker will grow more rapidly than the country with the greater initial level of output per worker.
• C) both countries will have the same growth rates of output per worker, even if they start out with different levels of output per worker.
• D) if both countries start out with different levels of income per worker, both countries may have different growth rates of output per worker, but we cannot be certain which country will have the higher growth rate of output per worker.

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Definitions:

Sacrifice Ratio

The sacrifice ratio measures the cost of reducing inflation in terms of the percentage of GDP lost per each percentage point decrease in inflation.

Volcker Disinflation

A period during the early 1980s when the Federal Reserve, led by Chairman Paul Volcker, raised interest rates to historically high levels in order to combat high inflation.

Estimates

Approximations or educated guesses based on current trends and data.

Expected Inflation

The anticipated rate at which the general level of prices for goods and services will rise over a period of time, affecting the purchasing power of a currency.