Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 6, Problem 4AP
To determine
To describe: The steady-state values of per worker capital, output and consumption is to be calculated. The effect on the steady state of an increase in h is to be explained.
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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.
In a standard Solow growth model that is calibrated in per-worker terms, what happens to the level of output when the saving rate (“s”) rises? How does the increase in “s” impact long-term output growth? How does the level of consumption change initially when savings rates rise? What happens to consumption over time?
1. In the Solow model, if investment (I=sY) is lower than depreciation (dK), then….
A. Depreciation (dK) in the following period will be higher than in the current period.
B. Capital stock (K) in the following period will be lower than in the current period.
C. Per-capita GDP (y) in the following period will be the same as in the current period.
D. Overall GDP (Y) in the following period will be higher than in the current period.
The answer is B - - Can you show work for it, graph the representation for it
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- The steady occurs when the economy is in equilibrium. Specifically, the steady state refers to the situation where K/N and Y/N are constant. K/N will not change when investment per worker equals depreciation per worker. During the adjustment process, the growth rates of Y, Y/N, and K/N will all be negative. Once the steady state is reached, these variables are constant and the growth rates will be zero. True Falsearrow_forwardIn the Solow model, population growth leads to steadystate growth in total output, but not in output per worker. Do you think this would still be true if the production function exhibited increasin g or decreasing returns to scale? Explain.arrow_forwardSuppose 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.arrow_forward
- Suppose an economy is in a steady state and its investment rate increases. Use the Solow model to illustrate and explain why the increase in the investment rate will raise the steady-state output level.arrow_forwardSuppose the Solow model describes an economy. The population grows at a 0.5% rate, and its labour efficiency grows at a 1% rate. Thus, in the steady state, capital per worker grows at a ____ rate. a. 1.5% b. 0% c. 0.5% d. 1%arrow_forwardCarefully discuss why consumption behaviour, as a microeconomic component, isimportant to the Solow Growth Model. (Include graphs and equations where necessary)arrow_forward
- “The Solow Model is useful for understanding growth in the short run but not for understanding long- run growth.” Discuss.arrow_forwardConsider an economy A described by the production function: Y = F(K, L) = K0.3L0.7. In economy B, everything is similar to economy A, except, saving rate is 40%. Explain how steady state output per worker, consumption per worker and golden rule level of capital stock will differ from those of country Aarrow_forwardConsider a Solow economy that begins with capital stock equal to $200 billion, and suppose itssteady-state level of capital is $400 billion. Now suppose this economy receives a gift of foreign aidin the form of $100 billion worth of capital.(a) Use the Solow model to explain what happens to capital per worker, output per worker, andconsumption per worker, both immediately and over time in this economy. (b) Suppose instead of starting below its steady state, the economy begins in steady state withcapital equal to $400 billion. Answer part (a) for this case. (c) In this example, does foreign aid have a long-run effect on the welfare of poor countries?arrow_forward
- Problem 1: How can policymakers influence a nation’s saving rate? Problem 2: Draw a well-labeled graph that illustrates the steady state of the Solow model with population growth. Use the graph to find what happens to steady-state capital per worker and income per worker in response to each of the following exogenous changes. a. A change in consumer preferences increases the saving rate. b. A change in weather patterns increases the depreciation rate. c. Better birth-control methods reduce the rate of population growth. d. A one-time, permanent improvement in technology increases the amount of output that can be produced from any given amount of capital and labor.arrow_forwardIn the general Solow model there is no (zero) growth in GDP per worker in steady state. True or Falsearrow_forwardIf the incremental capital output ratio is 3 and the ratio of saving to national income is 9%, according to the Harrod-Domar model the growth rate of income is Group of answer choices zero 3% 6% 12%arrow_forward
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