Week 3

Question 1

Where have economies moved in recent years?

Answer 1

• Moved from agriculture to industry
• Using capital instead of land as input
• Moved away from subsistence living

Question 2

What do growing societies use to produce goods and capital goods?

Answer 2

available current resources

Question 3

What does Solow model show?

Answer 3

How the theory of capital accumulation shows

• Technological progress raises living standards
• Technological progress is necessary for sustained growth in living standards

Question 4

What does the environment look like in the Solow model?

Answer 4

Question 5

How do we get from equation of motion of capital per worker to observing the steady state in order to analyze the effects of changes in savings rate, population growth and total factor of productivity on steady stake quantity of capital per capita.

Answer 5

Question 6

Graph the LHS and RHS of the equation to determine the steady state quantity of capital per capita.

Answer 6

Question 7

What are the 3 implications of the steady state of capital per capita.

Answer 7

Question 8

What can a change in savings rate be interpreted as?

Answer 8

It can be interpreted as change in consumer preferences. If consumers are more concerned about the future, they will save more. s increases.

Question 9

Show graphically what an increase in s does and what happens to the steady state of capital per capita.

Answer 9

Question 10

What effect does an increase in s have on growth rates of aggregate variables.

Answer 10

There is no effect, K, Y, I and C grow at growth in population n.

Question 11

When there is an increase in savings rate how does the economy adjust from one steady state to another. Show it diagrammatically and elaborate.

Answer 11

Question 12

What is the formula of consumption per worker in the steady state.

Answer 12

c = (1-s)zf(k*)

Question 13

In formula terms what is the consumption per worker in the steady state the difference of.

Answer 13

It is the difference between

income per worker
y=zf(k)

steady state savings per worker
s=szf(k)

Question 14

Graphically show the steady state consumption per worker.

Answer 14

Question 15

What is another way of showing consumption per worker in steady state using output per worker and actual investment

Answer 15

c=zf(k) - (n+d)k*

Question 16

Show consumption per worker in steady state c* as a function of capital per worker in steady state k*, then answer the question below.

If steady state quantity of capital per worker is k*gr what happens to the maximum consumption per worker.

Answer 16

Question 17

What is K*gr

Answer 17

It is the golden rule quantity of capital per worker.

Question 18

What property does the golden rule capital per capita have?

Answer 18

From the model, slope of the per worker production function where k=kgr which is equal to slope of function (n+d)K*. Since slope of per worker production function is marginal product of capital, at the golden rule steady state, the marginal product of capital we have

MPk = n+d

Question 19

What happens to the marginal product of capital when, capital is accumulated at the rate that maximizes consumption per worker in steady state.

Answer 19

The marginal product of capital equals the population growth rate + depreciation

Question 20

When is the savings rate at the golden rule saving rate sgr.

Answer 20

The curve sgr zf(k) intersects the line (n+d)k where k=kgr

Question 21

What happens if savings take place at golden rule?

Answer 21

In the steady state the current population consumes and saves the appropriate amount so that in each succeeding period, the population can continue to consume this maximum amount per person.

Question 22

From Figure 7.18 (b) if the steady state capital stock per worker is less than k*gr, what happens if there is an increase in saving rate?

Answer 22

It increases the steady state capital stock per worker and increases consumption per worker.

Question 23

From Figure 7.18 (b) if the steady state capital stock per worker is more than k*gr, what happens if there is an increase in saving rate?

Answer 23

It increases k* and causes a decrease in consumption per worker.

Question 24

Should governments implement polices to push or pull savings rate back to golden rate savings rule and why?

Answer 24

No

Any increase in saving rate would come at a cost in current consumption as it would take time to build up higher stock of capital to support higher consumption per worker in new steady state