Economic Growth1. Consider a Solow economy without population growth as described in Chapter 8 of Mankiw,but let the specific production technologv be described by YAK1/3[2/3. Suppose it beginswith a capital stock equal to $300 billion, and suppose its steady-state level of capital is equalto $500 bthe form of $100 billion worth of capital (electric power plants, machine tools, etc.)illion. To its pleasant surprise, the economy receives a generous gift of foreign aid in(a) What happens to the economy immediately? What happens over time? By what pro-ortion does consumption per person initially increase? What happens to consumptionin the long run!There is an immediate rise of K to $400 billion. Since it is now closer to the steadystate, the economy and capital stock will grow more slowly than before. Consumptionincreases by the ratio (400 /30011/3, or 10%. Long-run consumption won't change atall(b) Suppose instead of starting below its steady-state, the economy begins in steady-state,with a capital stock equal to $500 billion. Answer part (a) in this case. Consumption immediately increases by 1600/ 5001 = 3 = 6.3% and then starts de-clining. In the longrun, nothing changes

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Asked Feb 23, 2019
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Solow Growth Model 

 

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Economic Growth
1. Consider a Solow economy without population growth as described in Chapter 8 of Mankiw,
but let the specific production technologv be described by YAK1/3[2/3. Suppose it begins
with a capital stock equal to $300 billion, and suppose its steady-state level of capital is equal
to $500 b
the form of $100 billion worth of capital (electric power plants, machine tools, etc.)
illion. To its pleasant surprise, the economy receives a generous gift of foreign aid in
(a) What happens to the economy immediately? What happens over time? By what pro-
ortion does consumption per person initially increase? What happens to consumption
in the long run!
There is an immediate rise of K to $400 billion. Since it is now closer to the steady
state, the economy and capital stock will grow more slowly than before. Consumption
increases by the ratio (400 /30011/3, or 10%. Long-run consumption won't change at
all
(b) Suppose instead of starting below its steady-state, the economy begins in steady-state,
with a capital stock equal to $500 billion. Answer part (a) in this case
. Consumption immediately increases by 1600/ 5001 = 3 = 6.3% and then starts de-
clining. In the long
run, nothing changes
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Economic Growth 1. Consider a Solow economy without population growth as described in Chapter 8 of Mankiw, but let the specific production technologv be described by YAK1/3[2/3. Suppose it begins with a capital stock equal to $300 billion, and suppose its steady-state level of capital is equal to $500 b the form of $100 billion worth of capital (electric power plants, machine tools, etc.) illion. To its pleasant surprise, the economy receives a generous gift of foreign aid in (a) What happens to the economy immediately? What happens over time? By what pro- ortion does consumption per person initially increase? What happens to consumption in the long run! There is an immediate rise of K to $400 billion. Since it is now closer to the steady state, the economy and capital stock will grow more slowly than before. Consumption increases by the ratio (400 /30011/3, or 10%. Long-run consumption won't change at all (b) Suppose instead of starting below its steady-state, the economy begins in steady-state, with a capital stock equal to $500 billion. Answer part (a) in this case . Consumption immediately increases by 1600/ 5001 = 3 = 6.3% and then starts de- clining. In the long run, nothing changes

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Expert Answer

Step 1

From the questions, part a, this working is a short term phenomena and the increase in K will push the economy closer to the steady state. Since it is now closer to the steady stage, both capital and the economy grows slower than ever. Long run consumption does not change as this is a short run phenomena and over the long run, consumption also tends to stabilize.

Step 2

In Part b, we are assuming if the economy begins at steady state with a capital stock of $500, then there will definitely be a jump in consumption as the economy need not ...

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