Long Run growth

Question 1

What 3 factors provoke growth of the natural level of output?

Answer 1

Technology growth, growth in the capital stock, other factors

Question 2

Define long run growth.

Answer 2

The rise in output per capita (living conditions) overtime.

Question 3

What does per effective labour mean?

Answer 3

It refers to the variable in question divided by the productivity and labour employed.

Question 4

What is the production function in the LR and what does it mean?

Answer 4

y=f(k) Output per effective labour = f(capital stock per effective labour)

Question 5

How can changes in the capital per effective labour be shown?

Answer 5

From movements along the production function diagram

Question 6

Why is the production function concave?

Answer 6

due to the decreasing marginal returns of capital effective labour

Question 7

Why does capital stock per effective labour change?

Answer 7

Capital depreciates overtime (machines wear out), growth in technology and population dilutes the amount of capital that each effective labour can work with, new investment in capital goods.

Question 8

What is the investment formula for the long run,why?

Answer 8

sf(k) as s = savings rate and savings = investment in equilibrium.

Question 9

What is the required investment formula, what is it?

Answer 9

= deprecitation of capital + growth in technology and population. It is the minimium amount required to maintain the level of capital stock.

Question 10

When will capital stock increase?

Answer 10

If investment per effective labour is greater than the required investment.

Question 11

What is the steady state economy?

Answer 11

Where output per effective labour and capital per effective labour is constant and capital per worker and output per worker is growing at the rate of technology growth and output and capital are rising at the rate of population and technology growth.

Question 12

What if the capital stock of effective labour is greater than the steady state of the economy?

Answer 12

The capital stock of effecitve labour/investment will fall until it reaches the steady state.

Question 13

What causes a change in the steady state of the economy?

Answer 13

Changes in saving/investment - shifts the investment (sf(k) ) curve upwards.

Question 14

What determines the level of output in the long run?

Answer 14

Savings/investment - not permanent though

Question 15

Why might increasing savings not lead to better long run growth path?

Answer 15

Increased savings = lower consumption so more saving today causes consumption to fall today but raises future consumption.

Question 16

What is the golden rule level?

Answer 16

Graph that identifies the best combination of saving and consumption in a persons lifetime. Increasing saving below the optimal rate will increase capital and output per effective worker and consumption per effective worker. However increasing saving beyond optimal rate will see a rise in capital and output per effective worker but a fall in consumption per effective worker.