Solow model is important because it implies that O An economy that uses the neoclassical production function cannot grow at a positive rate forever. All the answers are implications of Solow model. An increase in savings results in a higher long-run economic
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- Some analysts claim that the economy is subject to a “paradox of thrift.” That is, increases in saving will cause consumption and GDP to fall. In support, they point to the fact that consumer spending is more than ⅔ of GDP. (a) Does the Solow model (described in Chapter 28 of Cowen and Tabarrok), show the paradox of thrift? Explain. (b) What about the real world? Do the data in Figure 28.8 below suggest a paradox of thrift? Explain.Question 2 If a natural disaster destroys a large portion of a country's capital stock but the saving and depreciation rates are unchanged, the Solow model predicts that the economy will grow and eventually reach:a. A lower steady-state level of output than it would have before the disasterb. None of these answers is correctC. The same steady-state level of output as it would have before the disasterd. A higher steady-state level of output than it would have before the disaster e. Not enough information is given now suppose you are given the data for Brazil and Portugal. In Brazil, the saving rate is 0.1 and the depreciation rate is 0.1, while in Portugal saving rate is 0.2 and the depreciation rate is 0.1. Using the Solow model, you conclude that in the steady-state: a. Brazil has a higher capital-output ratio than Portugal b. Portugal has a higher capital-output ratio than Brazil c. Brazil has a higher level of output than Portugal d. Portugal has a higher level of output than…Assume the economy can be described by the Solow model. Assume also that the economy is in its steady-state, defined in per-worker terms. Explain what happens in the event of a decrease in total factor productivity, both in the long-run and during the transition, in aggregate and per-worker variables. Is there a policy you could think of where the capital per worker in the new steady-states is the same as in the old steady-state? What would happen to consumption per-worker under this hypothetical policy?
- Long run economic growth a) An economy is in its steady-state. According to the Solow model, what will happen to output per worker if the saving rate were to increase? Draw a diagram to illustrate. b) According to the Solow model, an increase in the saving rate is not always desirable. Why not? c) In the world economy, we see a great disparity of income per person. Yet the Solow model predicts conditional convergence – that poor countries will grow faster than rich countries and eventually converge to the same level of income per person as the rich countries. According to the Solow model, what conditions must be met for convergence to occur?Solow-Swan Model Assume an economy with a production function that exhibits constant returns to capital.1 Ineach of the following cases, draw a Solow-Swan diagram and use is to explain whether andhow the economy converges to a steady state. Clearly identify any steady state(s) or otherwiseexplain why there is no steady state. (i) Assume the sum of population growth and the depreciation rate is greater than the savingrate.(ii) Instead assume the sum of population growth and the depreciation rate is less than thesaving rate.(iii) Instead assume that the sum of population growth and the depreciation rate is equal tothe saving rate. What is the importance of diminishing returns to capital in the Solow-Swan model?Why is the Malthusian model no longer regarded as an explanation for modern economies? What are the main differences between the Malthusian and the Solow models?
- In this question, you will explore how changes in the saving rate and the rate of technological progress affect an economy’s growth. In addition, you will examine how the golden rule saving rate depends on the production function. Consider the Solow (neoclassical) growth model with aggregate production function Y = K^alpha(AN)^(1-alpha). Each period lasts a year.Technical Progress in the Solow Model Suppose an economy that follows the assumptions of the Solow model saves a proportion s of its income every period, population grows at rate n, capital depreciates at rate d, and technical progress takes place at rate g. Assume it is not yet at steady state. a) Draw a graph to show initial level of capital k* < kss, output y* as well as the steady state levels of each. Be sure to draw and label the production function, investment and the line of effective depreciation, as well as k*, y*, kss and yss b) Explain what will happen to y* in the short run given this information (i.e. starting where k* < kss), according to the assumptions of the Solow growth model). c)At steady state, what is the growth rate of y*, y and Y? Explain your answersWhat determines whether a curve shifts in the Solow diagram? Make a listof the parameters of the Solow model, and state whether a change in eachparameter shifts a curve (which one?) or is simply a movement along bothcurves.
- 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?What is the principle of transition dynamics? Why does the Solow model leadto this principle, and why is it useful?Because advanced industrialized countries typically meet the conditions for the steady-state; and show positive growth, the Solow model fails to predict outcomes in these cases. Use the concept of spillovers to explain how we should allocate responsibility (or effort) on innovation between the government and private firms. Be sure to define spillovers.