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ECON 2102 Macroeconomics 2 - Tutorial 3: Solow Growth Model


Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. In the revised version of the Solow growth model the optimal level of capital stock per worker depends on: a. the saving rate. b. the depreciation rate. c. population growth rate. d. all of the above. 2. In the Solow growth model as a growing economy transitions to the steady state: a. the average product of capital falls. b. output per worker is constant. c. the average product of labor falls. d. the growth rate of capital is equal to zero. 3. In the Solow growth model, if the population growth rate, n, increases, then in the steady state: a. output per worker grows slower. b. capital per worker grows slower. c. capital per worker grows at the same rate, zero. d. all of the above. 4. If the saving rate increases in the Solow growth model, then during the transition to the steady state: a. the growth rate of capital per worker will increase. b. the growth rate of capital per worker will decrease. c. the growth rate of capital per worker is constant. d. the growth rate of capital per worker is zero. 5. In the Solow growth model during the transition an increase in technology: a. lowers the growth rate of capital and output per worker. b. raises the growth rate of capital per worker and lowers the growth rate of output per worker. c. raises the growth rate of capital and output per worker. d. lowers the growth rate of capital per worker and raises the growth rate of output per worker.

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6. In Figure 3.10, if the technology improves, then: a. s(y/k) curve shifts upwards. b. s + n line shifts upwards. c. s(y/k) curve shifts downwards. d. s + n line shifts downwards. 7. Suppose that an economy in Figure 3.10 starts at the steady state. Imagine that the amount of labor input unexpectedly increases at time T. Then, at time T: a. s(y/k) curve will shift upwards. b. k moves away from the steady state level c. s + n line will shift upwards. d. the growth rate of population will increase. 8. In Figure 3.10, if the population growth rate increases, then: a. s(y/k) curve shifts upwards. b. s + n line shifts upwards c. s + n line shifts downwards d. the initial amount of labor increases. 9. In Figure 3.10, an increase in productivity: a. raises the steady state growth rate of capital per worker. b. does not change steady-state growth rates of output or capital per worker. c. lowers the steady state growth rate of output per worker d. lowers the steady-state level of capital.

Name: ________________________ ____ 10. In Figure 3.10, an increase in the depreciation rate has the same effects as: a. an increase in the savings rate. b. an increase in the initial amount of labor. c. an increase in the population growth rate. d. all of the above. ____ 11. In Figure 3.10, if the technology improves, then: a. the steady-state capital stock increases. b. the steady-state growth in capital per worker increases. c. the steady-state growth in output per worker increases. d. the population growth rate increases. ____ 12. The data show a tendency of output per worker to converge: a. among US States from 1880 to 2000. b. countries with similar economies. c. in OECD countries from 1960 to 2000. d. all of the above. ____ 13. Convergence will not happen if economies around the world have: a. different saving rates. b. different average products of capital in the transition. c. different levels out labor input. d. all of the above. ____ 14. Convergence will not happen if economies around the world have: a. different average products of capital during the transition. b. different initial levels of labor input. c. different optimum levels of capital per worker, k*. d. all of the above. ____ 15. Convergence will not happen if economies around the world have: a. different savings rates. b. different population growth rates. c. different optimum levels of capital per worker, k*. d. all of the above. Short Answer

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16. What are the long and short run effects of an increase in technology, A, in the Solow growth model? 17. What are the long run and short run effects to an increase in the labor input in the Solow growth model?

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18. For 112 countries, Figure 4.9 shows that the growth rate of real GDP per capita from 1960 to 2000 bears little relation to the level of real GDP in 1960. Does this finding conflict with the predictions of the Solow Growth model?

Problem 19. Suppose that the saving rate, s, can vary as an economy develops. a) The equation for the growth rate of capital per worker, k, is given by k/k = s(y/k) - s - n Is this equation still valid when s is not constant? b) Suppose that s rises as an economy develops; that is, rich countries save at higher rate than poor countries. How does this behavior affect the results about convergence? c) Suppose, instead, that s falls as an economy develops; that is, rich countries save at lower rate than poor countries. How does this behavior affect the results about convergence? d) Which case seems more plausible - b) or c) above? Explain. Now suppose that the population growth rate, n, can vary as an economy develops. e) The equation for the growth rate of capital per worker, k, is still given by k/k = s(y/k) - s - n Is this equation valid when n is not constant? f) Suppose that n falls as an economy develops; that is, rich countries have lower population growth rate than poor countries. How does this behavior affect the results about convergence? g) Suppose, instead, that n rises as an economy develops; that is, rich countries have higher population growth rate than poor countries. How does this behavior affect the results about convergence? h) Which case seems more plausible - f) or g) above? Explain, giving particular attention to the views of Malthus about endogenous population growth. 4