Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 10, Problem 5RQ
To determine
To Explain: The meaning of the Solow residual and its behavior over the stages of the business cycle.
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What is the principle of transition dynamics? Why does the Solow model leadto this principle, and why is it useful?
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.
What is the direct or indirect relationship between Consumption behavior and the Solow Growth Model? Please include any important equations.
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- In a neoclassical (Solow) growth model, does a decrease in the savings rate permanently affectsthe growth rate of real output? Why or why not? Explain and show graphically.arrow_forwardList the two most important factors influencing Long-run Economic Growth. According to Neoclassical (Solow) growth theory, what factor has been the most important driver of US economic growth in the last century? What has been the most important influence on growth according to New Growth Theory?arrow_forwardWhat is the economic meaning of the vertical gap between the investmentcurve and the depreciation curve in the Solow diagram?arrow_forward
- 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?arrow_forwardExplain the effects of a change in total factor productivity on the saving rates consistent with the Golden Rule of the Solow Model.arrow_forwardPlot also the changes in the Solow graph and in a single ratioscale grapharrow_forward
- What can the Solow model tell us about growth in the short term and in the long term? What is different between the Solow model and the endogenous growth model?arrow_forwardCarefully discuss why consumption behaviour, as a microeconomic component, isimportant to the Solow Growth Model. (Include graphs and equations where necessary)arrow_forwardQuestion: The Solow model maintains a key assumption with respect to the production function. Without this assumption, the model economy does not converge to a steady state. What is this assumption?arrow_forward
- Consider the Solow Model. Suppose a country enacts a tax policy that discourages investment, and the policy reduces the investment rate immediately and permanently from sbar to sbarprime . Assuming the economy (and hence the initial capital stock) is ABOVE its initial steady state (note: this is different from the standard case where we start at the intial steady state), use the Solow diagram to explain what happens to the economy over time and in the long run. Draw a graph showing how output evolves over time (put Y_t on the vertical axis with a ratio scale and time on the horizontal axis), and explain what happens to economic growth over time.arrow_forwardWhat are the draw backs of Solow growth modelarrow_forward“The Solow Model is useful for understanding growth in the short run but not for understanding long- run growth.” Discuss.arrow_forward
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