Question 1

Economic growth is primarily achieved by maximizing capital accumulation and maintaining perfectly competitive markets at all times.

Accepted Answer

Temporary monopoly power (and the resulting abnormal profits) is a necessary incentive. Without the promise of these temporary 'rents', firms would not invest in risky Research & Development.

Question 2

Endogenous growth theory was entirely created by Aghion and Howitt in the 1990s.

Accepted Answer

Endogenous growth was pioneered by Paul Romer and Robert Lucas in the 1980s. Aghion and Howitt specifically contributed the 'Schumpeterian' branch, which added the element of 'destruction' to Romer's earlier models.

Question 3

Consider the following statements regarding theories of economic growth:
1. The Solow-Swan model treats technological progress as an endogenous variable driven by profit-seeking R&D investments.
2. According to Joel Mokyr, sustained economic growth requires a continuous feedback loop between propositional knowledge (science) and prescriptive knowledge (engineering).
3. The Aghion-Howitt model diverges from Paul Romer's earlier endogenous growth models by explicitly incorporating the obsolescence of existing technologies.
How many of the statements given above are correct?

Accepted Answer

(b) Only two — Statement 1 is incorrect: The Solow-Swan model treats technological progress as an EXOGENOUS (external) variable, which is exactly the limitation endogenous growth theories sought to fix. Statement 2 is correct: Mokyr's historical analysis highlighted this synergy ('useful knowledge') as a prerequisite for the Industrial Revolution. Statement 3 is correct: While Romer modeled growth via 'expanding varieties' (adding new goods), Aghion and Howitt introduced 'creative destruction' (new goods replacing old ones).

Question 4

Match the Economic Model/Concept (List I) with its Core Characteristic (List II):

List I:
A. Solow-Swan Model
B. Romer's Expanding Varieties Model
C. Aghion-Howitt Model
D. Mokyr's Framework

List II:
1. Innovation continuously renders previous technologies obsolete
2. Long-term growth is driven by exogenous, unexplained technological change
3. Historical analysis of how scientific theory and practical engineering interact to form 'useful knowledge'
4. Growth occurs by inventing new types of goods that do not necessarily replace old ones

Select the correct answer using the code given below:

Accepted Answer

(a) A-2, B-4, C-1, D-3 — The Solow-Swan model (A) relies on exogenous technological change (2). Paul Romer's endogenous growth model (B) focuses on adding new varieties of goods without destroying old ones (4). The Aghion-Howitt model (C) formalizes Schumpeterian creative destruction, where new innovations replace old ones (1). Joel Mokyr (D) is an economic historian who explained growth through the cultural evolution of useful knowledge (3).

Question 5

Assertion (A): According to Schumpeterian growth theory, government policies that strictly prevent any firm from acquiring even temporary monopoly power will maximize long-term economic growth.
Reason (R): The process of creative destruction relies on the lure of temporary monopoly rents to incentivize entrepreneurs to invest heavily in research and development.
Select the correct answer:

Accepted Answer

(d) A is false but R is true. — Assertion (A) is false. Schumpeterian growth theory (formalized by Aghion and Howitt) argues that if governments strictly prevent all monopoly power, firms will have no incentive to innovate because they cannot recoup their R&D costs. Reason (R) is true; the prospect of earning temporary monopoly profits (rents) is the fundamental economic driver of 'creative destruction'.

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