EBK MACROECONOMICS (FOURTH EDITION)
4th Edition
ISBN: 9780393616125
Author: Jones
Publisher: YUZU
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Question
Chapter 5, Problem 5E
(a)
To determine
The impact of the generous foreign aid to the Solow model economy.
(b)
To determine
The impact of the generous foreign aid to the Solow model economy at steady state.
(c)
To determine
The possible consequences of the foreign aid.
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Consider a Solow economy that begins with capital stock equal to $200 billion, and suppose its
steady-state level of capital is $400 billion. Now suppose this economy receives a gift of foreign aid
in the form of $100 billion worth of capital.
(a) Use the Solow model to explain what happens to capital per worker, output per worker, and
consumption per worker, both immediately and over time in this economy.
a)
(b) Suppose instead of starting below its steady state, the economy begins in steady state with
capital equal to $400 billion. Answer part (a) for this case.
point)
(c) In this example, does foreign aid have a long-run effect on the welfare of poor countries? (1
pol)
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 answers
an economy is described by the Solow-Swan model with the following variables,
E(t)=1
The saving rate is 0.41 per year.
Labor's share of income is 0.44.
The growth rate of labor efficiency is 0.03 per year.
The growth rate of the labor force is 0.02 per year
Depreciation is 0.09 per year.
calculate the steady-state value of the capital-to-labor ratio, K/L
Enter your answer to two places after the decimal.
Chapter 5 Solutions
EBK MACROECONOMICS (FOURTH EDITION)
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Similar questions
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- a) Consider two countries that have the same parameters and exogenous variables (i.e. they have the same values for s¯, d¯, L¯ etc). Country A starts with a level of capital above the steady state. Country B starts below the steady state. First, plot the Solow diagram, explain why country B will grow but country A will shrink. b) Solve for steady state level of capital per person, k∗.arrow_forwardYou were discussing the growth models with your friend Gaston during spring break. He summarized that the basic difference between the Solow model and the Romer model is that the Solow model suffers from diminishing returns-each additional unit of capital has less benefit than the previous unit. The Romer model doesn't have the same problem as labor used to generate new ideas doesn't have diminishing returns. He hypothesizes that if you changed the law of motion to At+1 = At + zol1/2A; that now the Romer model has diminishing returns to labor and will reach a steady state where growth is zero. Is he right?arrow_forward(a) Explain the role of capital, labor, and technology in the Solow growth model. (b) Illustrate the steady-state equilibrium in the Solow growth model using a graph, and explain how changes in the savings rate and technological progress affect the steady-state equilibrium. 2. Consider an economy with the following production function: Y = K^0.3 * (AL)^0.7, where Y is output, K is capital, L is labor, and A is the level of technology. (a) Calculate the marginal product of capital (MPK) and the marginal product of labor (MPL). (b) If the capital stock (K) is 100, the labor force (L) is 200, and the level of technology (A) is 2, find the level of output (Y) in this economy. 3. Suppose there is a negative demand shock that causes the aggregate demand equation in an economy to change from: AD1: Y = 2000 - 100P to AD2: Y = 1800 - 100P The aggregate supply equation is given by: AS: Y = 400 + 50P (a) Calculate the initial equilibrium price level (P1) and real output (Y1)…arrow_forward
- 2) Assume that two countries are identical in every respect, except Country A initially has more capital per worker than Country B (i.e. they have the same saving rate (s), labor supply growth rate (n), depreciation rate (d), total factor productivity (A), and elasticity of output with respect to capital (a)). A) According to the Solow model, which country has greater income per worker initially? B) According to the Solow model, which country will grow faster in the short-run? What about the long-run? Explain your answer. C) Compare Country A’s steady-state output per worker with Country B’s in the Solow model. Explain.arrow_forwardUse the Solow model below to answer the question. Y Y3 Y₂ Y₁ K₁₁ K₂ K3 Y = Af(K,H) dk SY K Suppose that Y₁ is 1,475, Y₂ is 6,184, and Y3 is 10,992. The savings rate for this economy is 30% and the depreciation rate is 8.2%. If this economy is currently at a GDP of 1,475, what is the smallest amount of foreign aid which would move the economy up to a GDP of 10,992? Assume that all foreign aid becomes investment. Round your final answer to two decimal places.arrow_forwardFor which of the following does the Solow model NOT provide adequate explanation? a. Why population growth rates differ across countries b. Why saving rates differ across countries The case of productivity differences across countries О с. d. What causes long-term economic growth Ое. All of these answers are correctarrow_forward
- We presented two versions of the Solow growth model. (1) In the simple version, there is no technological progress. Show in this simple version that at the steady state output per worker (GDP per worker) depends positively on the saving rate, and negatively on the population growth rate. What’s the growth rate of GDP at the steady state? What’s the growth rate of GDP per worker at the steady state? (2) In the version of the model with technological progress, what’s the growth rate of GDP at the steady state? What’s the growth rate of capital per worker at the steady state? What’s the growth rate of GDP per worker at the steady state? Show your stepsarrow_forwardanswer part a, b and c please!arrow_forwardAccording to the Solow-Swan model, for a country that is initially in steady state, if the technology parameter A rises, then: the per capita capital stock initially increases, then returns to its initial steady state level the per capita capital stock decreases and the country moves to a new, lower steady state level of per capita income the per capita capital stock initially decreases, then returns to its initial steady state level O the per capita capital stock increases and the country moves to a new, higher steady state level of per capita incomearrow_forward
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