Question 1: Consider the case of a Solow economy on a balanced growth path. Describe how, if at all, each of the following developments affect the break-even and actual investment lines. Provide a graph to accompany your explanation. a) An increase in the rate at which the population grows b) A decrease in depreciation Question 2: Evaluate the following statement: "According to the Solow model, an increase in savings is always good because it will lead to higher capital and output per worker in the steady state".

Question 1: Consider the case of a Solow economy on a balanced growth path. Describe how, if at all, each of the following developments affect the break-even and actual investment lines. Provide a graph to accompany your explanation. a) An increase in the rate at which the population grows b) A decrease in depreciation Question 2: Evaluate the following statement: "According to the Solow model, an increase in savings is always good because it will lead to higher capital and output per worker in 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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Consider the Solow growth model with concave production function as studied in class. Supposethe economy is initially in the picture below, and currently has the level of capital stock of K0. What wouldhappen to the dynamics of capital accumulations when depreciation rate increases? Graphically denote thedirection and the speed of change/accumulation/decumulation of the capital stock, then verbally explain whythey move like so.
Consider the Solow Model with no population or technological growth. Suppose that two countriesare identical except that in Country A the depreciation rate is greater than the depreciation rate inCountry B.a. How do you compare the steady state level of capital per worker in these countries? Illustrategraphically. Explain the economic intuition for the di erences in capital per worker in steadystate.b. Which country a higher output per worker in steady state? What about investment per workerin steady state? Explain carefully.
4 Consider the context of the Solow model with technical progress in an excess saving scenario, that is,the savings rate is higher than the golden rule savings rate. Imagine that the economy started is in steady state, but at time t0 the saving rate increases suddenly. Elaborate graphs that show the evolution over time of the variables mentioned in the followingparagraphs as a result of the previous event .a) Growth rate of capital per effective workerb) Growth rate of capital per workerc) Capital growth rated) Natural logarithm of capital per effective workere) Natural logarithm of capital per workerf) Natural logarithm of capital
Suppose people can consume the income they earn or save and invest it at rate "r". A. If we tax wealth at a rate greater than "r", how are people likely to adjust their rate of savings? B. Use the Solow model to comment on how a wealth tax will likely affect the growth rate of the capital stock. How will this policy affect the growth rate of output per worker? How will this policy affect the wage rate for workers? C. To what extent is this wealth tax likely to reduce the influence of the wealthy in politics? D. In the Peterson Institute discussion, Greg Mankiw argues that accumulating wealth creates a pecuniary externality. What does Mankiw mean? How would you expect a wealth subsidy to affect the real wage for workers?
(a) Consider an economy that is initially in a steady state equilibrium. Assume that in this equilibrium it has a saving rate of 50 per cent and a depreciation rate of 2 per cent. Further assume that the population growth rate is 3% and that the level of output produced can be represented by the following production function: = where A = 1 and = 0.5. Use the Solow-Swan model to determine the level of capital per worker and output per worker in this economy. (1 mark) (b) Now suppose the government introduces a set of policies to improve the institutional set up as well as better production technique which increases total factor productivity by double. What is the new steady state level of capital per worker and output per worker? (1 mark) (c) Use a Solow-Swan diagram to show the qualitative effects of this new government policy upon steady state output per worker and capital per worker. Briefly describe the intuition behind this result. (1 mark) (d) Now suppose, population growth rate…
Q1. In the Solow model, suppose s=0.3, delta(depreciation)=0.05, output f(k) = sqrt of k. The economy starts at time t=0 with k=1. Suppose there is expropriation by the government and the entrepreneur only gets to keep 30% out its output. a) What is the capital per worker at time t=1? b) How does this compare with the case of no expropriation?
Many demographers predict that the UnitedStates will have zero population growth in thetwenty-first century, in contrast to average popu-lation growth of about 1 percent per year in thetwentieth century. Use the Solow model to fore-cast the effect of this slowdown in populationgrowth on the growth of total output and the growth of output per person. Consider theeffects both in the steady state and in the transi-tion between steady states.
which statement \s are true. use graphs to exlain a. In the Solow growth model, the saving rate is a crucial determinant of the economy's long-run growth rate of output per worker. b. In the endogenous growth model , the representative firm sets the wage so that the demand and supply of efficiency units of labour are equal. c. In the endogenous growth model , there is no steady state of the economy as human capital will always continue to grow forever. d. The assumption of Constant Returns to Scale technology implies that the marginal product of factor imput is always decreasing.
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.
Answer Part B Suppose people can consume the income they earn or save and invest it at rate ?.A. If we tax wealth at a rate greater than ?, how are people likely to adjust their rate of savings? B. Use the Solow model to comment on how a wealth tax will likely affect the growth rate of the capital stock. How will this policy affect the growth rate of output per worker and how will this policy affect the wage rate for workers? C. To what extent is this wealth tax likely to reduce the influence of the wealthy in politics? D. In the Peterson Institute discussion, Greg Mankiw argues that accumulating wealth creates a pecuniary externality. What does Mankiw mean? How would you expect a wealth subsidy to affect the real wage for workers?
Answer all parts Suppose people can consume the income they earn or save and invest it at rate r?.A. If we tax wealth at a rate greater than r?, how are people likely to adjust their rate of savings? B. Use the Solow model to comment on how a wealth tax will likely affect the growth rate of the capital stock. How will this policy affect the growth rate of output per worker and how will this policy affect the wage rate for workers? C. To what extent is this wealth tax likely to reduce the influence of the wealthy in politics? D. In the Peterson Institute discussion, Greg Mankiw argues that accumulating wealth creates a pecuniary externality. What does Mankiw mean and how would you expect a wealth subsidy to affect the real wage for workers?
Growth rates in the Solow model (II): Suppose an economy begins in steadystate and is characterized by the following parameter values: s = 0.2, d = 0.1,A = 1, L = 100. Apply your answer to exercise 9 to calculate the growth ofper capita GDP in the period immediately after each of the changes listedbelow. (Hint: Since the economy begins in steady state, its growth rate isinitially zero and Kt = K∗.)(a) Te investment rate doubles.(b) Te productivity level rises by 10%.(c) An earthquake destroys 75% of the capital stock.(d) A more generous immigration policy leads the population to double.