Lecture 7 - Population Growth in the Solow Model

Question 1

An increase in the depreciation rate has what effect on the value of the steady state?

Answer 1

it causes the capital stock to grow toward a lower steady state

Question 2

What does an increase in the depreciation rate look like graphically on an investment vs k graph?

Answer 2

a rotation upwards, so a larger gradient

Question 3

What does an increase in the saving rate do investment?

Answer 3

an increase in the saving rate raises investment

Question 4

What does an increasing in the saving rate do to the value of the steady state?

Answer 4

• increase in the saving rate raises investment
• causing the capital stock to grow toward a higher steady state

Question 5

What does an increase in the saving rate look like graphically on an investment vs k graph?

Answer 5

an outward ‘rotation’ about the origin

Question 6

Show why, according to the Solow model, why higher s leads to higher y*?

Answer 6

• higher s –> higher k*
• since y = f(k)
• higher k* –> higher y*

Question 7

The Solow model predicts that countries with higher rates of saving and investment will have higher levels of ______ and _________ in the long run

Answer 7

higher levels of capital and income per worker in the long run

Question 8

Why according to the Solow model, does saving and investment not sustain perpetual long-run growth

Answer 8

due to diminishing returns

Question 9

What does ΔK equal in aggregate terms?

Answer 9

ΔK = sF(K,L) - 𝛿K