Ch. 7: Practice Questions 1. Suppose we started out at the steady state capital
ID: 1111597 • Letter: C
Question
Ch. 7: Practice Questions 1. Suppose we started out at the steady state capital stock in the basic Solow growth model. If there subsequently were an increase in the demand for loanable funds due to more favorable tax treatment of business investment, then we would expect to see a. economic growth rates increase in the short run and the nation's capital stock to grow from its current level. b. economic growth rates decrease in the short run and the nation's capital stock to grow from its current level. c. economic growth rates increase in the short run and the nation's capital stock to decrease from its current level. d. economic growth rates decrease in the short run and the nation's capital stock to decrease from its current level. e. economic growth rates stay the same in the short run and the nation's capital stock to grow from its current level.Explanation / Answer
1. Correct option: (a)
Reason: As business investment will increase, production will increase and so will economic growth.
Nation's capital stock will increase too because production is increased, which will then demand more investment and thus more capital.
2. Correct option: $38,000
Reason: Total reserves = required reserve + excess reserves
Required reserves = 20% of 150,000 = 30,000
Excess reserves = 8000
Total reserves = 30,000 + 8,000 = 38,000