6. Consider the Solow growth model with aggregate production function F(K, L) = AK¹/312/3 and saving rate 5 = 0.5. The economy is initially at a steady state. A change of the saving rate from 5 = 0.5 to 5 = 1/3 leads to: a. An increase in consumption at all future dates. b. A decrease in consumption at all future dates c. An increase in consumption in the short run and a decrease in consumption at the new steady state. d. A decrease in consumption in the short run and an increase in consumption at the new steady state. e. An increase in consumption in the short run and no change in consumption at the steady state.

6. Consider the Solow growth model with aggregate production function F(K, L) = AK¹/312/3 and saving rate 5 = 0.5. The economy is initially at a steady state. A change of the saving rate from 5 = 0.5 to 5 = 1/3 leads to: a. An increase in consumption at all future dates. b. A decrease in consumption at all future dates c. An increase in consumption in the short run and a decrease in consumption at the new steady state. d. A decrease in consumption in the short run and an increase in consumption at the new steady state. e. An increase in consumption in the short run and no change in consumption at the steady state.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose a Solow economy is initially at its steady state k∗, and suddenly is hit by a decrease in the depreciation rate δ, from δ to δ1. This change does not alter any of the other exogenous parameters in the model Depict this situation in a graph What happens to steady state level of capital per capita in this situation? What happens to the level of capital per capita over time? Depict this in a graph and explain intuitively.
3. In the Golden Rule steady state in a Solow model with population growth, the marginal product of capital (MPK) is equal to the savings rate plus the population growth rate. population growth rate plus the depreciation rate. depreciation rate plus the savings rate. savings rate divided by the marginal product of labor. Savings rate divided by the growth rate.
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Carefully discuss why consumption behaviour, as a microeconomic component, isimportant to the Solow Growth Model. (Include graphs and equations where necessary)
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