Economic Growth I

Question 1

Solow Model

Answer 1

looks at the determinants of economic growth

and the standard of living in the long run

Question 2

TFP =

Answer 2

Output/Input

Question 3

Define y = Y / L

Answer 3

output per worker

Question 4

Define k = K/L

Answer 4

capital per worker

Question 5

If A increases - TFP what happens

Answer 5

the MPL, MPK, APK, APL and Y will all increase

Question 6

How does TFP affect income inequality?

Answer 6

Question 7

Marginal product of unskilled labour

Answer 7

MPU = (1 - µ) Y/LU

Question 8

Marginal Product of Educated labour

Answer 8

MPE = µ Y/LE

Question 9

µ will be much higher as you get more

Answer 9

production if you increase skilled workers rather than if you increase unskilled worker

Question 10

Skill premium equals

Answer 10

= Income Inequality = WageE – Wageu

Question 11

So, when Y increases due to increase in TFP

Answer 11

– the productivity of skilled labour increase will be much higher than the productivity increase of unskilled labour
- This is because skilled labour know how to apply new technology better than unskilled labour so they will be able to make better use of it in order to be more productive

Question 12

Explain if when government provides more education

Answer 12

it will mean that number of skilled labour will increase – and number of unskilled labour will fall

Ø This will reduce the real wage for skilled workers due to increase supply
and wage rate for unskilled labour falls due to reduced supply
Ø This will reduce the level of income inequality

Question 13

Ø If technology moves faster than education?

Answer 13

income inequality will

increase – and if education moves faster income inequality will decrease

Question 14

if economy wants to have sustainable technology growth they need to do what?

Answer 14

they need to sustain

the level of education

Question 15

I = ∆K

Answer 15

Investment means purchase of good and services that are durable and input for
production

Question 16

GDPs grows in the long run because of?

Answer 16

investment – investment is the purchase of capital for input – this will increase the capital stock

Question 17

Increase in capital stock will mean that GDP = Y will increase. What will it also mean?

Answer 17

This means that savings will also increase as S = Y – C – G so as Y increases so will
savings

Question 18

Since savings have increased in the short term it will

Answer 18

there will be a surplus of loanable funds as the interest rate hasn’t adjusted – in the long run interest rate will fall until the loanable funds market is in equilibrium. This will lead to an increase in investment leading to increase in GDP again as shown
above

Question 19

GDP cannot grow forever and ever

Answer 19

GDP will only grow if investment is

more than the depreciation