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- 6. Using the Solow Model, determine graphically, the steady state for capital and output when there is an: (a) a permanent decrease in the savings rate (b) a permanent decrease in A (c) a permanent increase in the depreciation rate.5. Long run economic growth a) An economy is in its steady-state. According to the Solow model, what will happen to output per worker if the saving rate were to increase? Draw a diagram to illustrate. b) According to the Solow model, an increase in the saving rate is not always desirable. Why not? c) In the world economy, we see a great disparity of income per person. Yet the Solow model predicts conditional convergence - that poor countries will grow faster than rich countries and eventually converge to the same level of income per person as the rich countries. According to the Solow model, what conditions must be met for convergence to occur?Suppose an economy begins in steady state. By what proportion does per capita GDP change in the long run in reponse to each of the following changes? Production function is Y=AK^1/3L^2/3 a. Investment rate doubles b. depreciation rate falls by 10% c. Productivity level rises by 10% d. Earthquake destrys 75% of the capital stock e. Generous immigration policy lead the population to double
- 5. Suppose that the economy's production function is Y = √KVLA where K is capital, L is labor, and A is the state of technology. Suppose that the saving rate (s) is equal to 2.4%, the rate of depreciation of capital (6) is equal to 3%, the number of workers grow at 0.7% per year and the rate of technological progress is 3%. (a) Find the steady state values of: iv. v. growth rate of output growth rate of output per worker (b) Suppose that the growth rate of workers decreases. What is its short-run and the long-run effect on the growth rate of output per worker ?12. Suppose an economy represented by the graph below started with K = 25, so it was in a steady state, but then disaster struck and most of the capital was destroyed. (Assume that no people were hurt so the labor force is the same size.) dK 25 K After the disaster would we expect the economy to grow or shrink? a. grow, I> dK b. grow, I dK d. shrink, I< dK7. Suppose that the economy's production function is Y = √K√LA where K is capital, L is labor, and A is the state of technology. Suppose that the saving rate (s) is equal to 6%, the rate of depreciation of capital (8) is equal to 5%, the number of workers grow at 5% per year and the rate of technological progress is 4%. (a) Find the steady state values of: iv. growth rate of output per worker growth rate of output v. (b) Suppose that the saving rate increases. What is its short-run and the long-run effect on the growth rate of per-capita output?
- 4. The Solow model describes: how saving rates are determined the static relationship between capital and output how savings, population growth, and technological change affect output over time how savings, population growth, and technological change affect output in a single period what constitutes technological change5. Suppose that the economy's production function is Y = √K√LA where K is capital, L is labor, and A is the state of technology. Suppose that the saving rate (s) is equal to 2.4%, the rate of depreciation of capital (8) is equal to 3%, the number of workers grow at 0.7% per year and the rate of technological progress is 3%. (a) Find the steady state values of: i. 11. capital stock per effective worker output per effective worker growth rate of output per effective worker3. Using your Solow Model, illustrate the effects of the following on steady state GDP and steady state capital per person (separate diagrams, please) a. the population growth rate decreases b. the government forces the economy to save more.
- 1. Draw a well-labeled graph that illustrates the steady-state of the Solow model with population growth. Use the graph to find what happens to steady-state capital per worker and income per worker in response to each of the following exogenous changes.a. A change in consumer preferences increases the saving rate.b. A change in weather patterns increases the depreciation rate.c. Better birth-control methods reduce the rate of population growth.16 True or False? The key difference between the Solow and production/expenditure models of the economy is that the Solow model endogenizes the saving rate.Part 1 - Practice Questions 1. Suppose that a country enacts a tax policy that discourages investment and pushes the savings rate permanently lower from 5₁ to 52. Assume the economy is initially in its steady state. a. Use the Solow diagram to explain how the economy reaches its new steady state. b. Draw a graph showing how output evolves over time with Y on the y-axis and time on the x-axis and explain what happens to growth over time. 2. Explain whether each of the goods below are rivalrous or non-rivalrous. a. An iPhone b. A method for mass producing goods c. The Pythagorean theorem 3. Suppose an economy is currently on a balance growth path as described by the Romer model. For the following scenarios, determine whether the change will affect growth of and/or level of output per person; make use of the two equations noted in experiment #1 and #2 in Lecture 6 to support your answer. Then, using a ratio scale graph, illustrate the initial balanced growth path and the new path caused…